Strategic Intellectual

Capital Management in
Multinational
Organizations:
Sustainability and Successful
Implications

Kevin J. O'Sullivan
New York Institute of Technology, USA

Business science reference

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Library of Congress Cataloging-in-Publication Data

Strategic intellectual capital management in multinational organizations :

sustainability and successful implications / Kevin J. O'Sullivan, editor.
p. cm.
Includes bibliographical references and index.
Summary: "This book highlights areas of concern in management of
intellectual capital and demonstrates opportunities for the successful use of
these tactics"--Provided by publisher.
ISBN 978-1-60566-679-2 (hardcover) -- ISBN 978-1-60566-680-8 (ebook) 1.
Intellectual capital. 2. Intellectual capital--Management. 3. International
business enterprises. 4. Intercultural communication. 5. Corporate culture.
I. O'Sullivan, Kevin, 1967- II. Title.

HD53.S764 2010
658.4'038--dc22

2009018418
British Cataloguing in Publication Data
A Cataloguing in Publication record for this book is available from the British Library.

All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the
authors, but not necessarily of the publisher.
Table of Contents

Preface ................................................................................................................................................xiii

Acknowledgment ................................................................................................................................ xix

Section 1
Leadership

Chapter 1
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization ............................... 1
Alan M. Thompson, Production Services Network Ltd., Scotland

Chapter 2
An Epistemology of Intellectual Capital and its Transition to a Practical Application ........................ 17
Jan Carrell, Northwestern College, Colorado Technical University, USA

Chapter 3
Multinational Intellect: The Synergistic Power of Cross Cultural Knowledge Networks .................... 44
Leslie Gadman, London South Bank University, UK
Robert Richardson, Mental Health Associates, USA

Chapter 4
Dynamic Capabilities in R&D-Networks ............................................................................................. 58
Arla Juntunen, Helsinki School of Economics, Finland

Section 2
Strategy

Chapter 5
Intellectual Capital Measurement and Reporting: Issues and Challenges
for Multinational Organizations ............................................................................................................ 75
Suresh Cuganesan, Swinburne University of Technology, Australia
Richard Petty, Macquarie University, Australia
Chapter 6
National Intellectual Capital Stocks and Organizational Cultures:
A Comparison of Lebanon and Iran ...................................................................................................... 95
Jamal A. Nazari, Mount Royal College/University of Calgary, Canada
Irene M. Herremans, University of Calgary, Canada
Armond Manassian, American University of Beirut, Lebanon
Robert G. Isaac, University of Calgary, Canada

Chapter 7
A Knowledge Management Framework to Manage Intellectual Capital
for Corporate Sustainability ................................................................................................................ 119
Herbert Robinson, London South Bank University, UK

Chapter 8
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines ............. 136
Tomás M. Bañegil Palacios, Universy of Extremadura, Spain
Ramón Sanguino Galván, University of Extremadura, Spain

Chapter 9
The Role of ICTs in the Management of Multinational Intellectual Capital ...................................... 144
Mirghani S. Mohamed, New York Institute of Technology, Bahrain
Mona A. Mohamed, New York Institute of Technology, Bahrain

Chapter 10
The Link Between Learning Capability and Business Performance in MNEs:
The Role of Intellectual Capital .......................................................................................................... 160
Isabel Mª Prieto, Universidad de Valladolid, Spain
Elena Revilla, Instituto de Empresa, Spain

Section 3
Implementation

Chapter 11
Managing Corporate Responsibility to Foster Intangibles: A Convergence Model ........................... 178
Matteo Pedrini, Altis–Postgraduate School Business & Society, Italy

Chapter 12
Intellectual Capital Management in Long-Lasting Family Firms: The DuPont Case ........................ 207
Rosa Nelly Trevinyo-Rodríguez, EGADE Campus Monterrey, México

Chapter 13
Knowledge Management and the Links to Human Capital Management:
Leadership, Management Capabilities and Sustainability .................................................................. 221
Marianne Gloet, Abu Dhabi Women’s College, UAE
Chapter 14
Building and Maintaining Human Capital with Learning Management Systems .............................. 234
Tom Butler, University College Cork, Ireland
Audrey Grace, University College Cork, Ireland

Chapter 15
Multinational Companies and Their Link to the Intellectual Capital of Territories: A Proposal
of a Tool to Evaluate the Sustainable Development of the Region through its Intangible Assets ...... 249
Agustín J. Sánchez Medina, University of Las Palmas de Gran Canaria, Spain

Chapter 16
International New Ventures, Organization Structure, and IC Management ....................................... 271
Irene M. Herremans, University of Calgary, Canada
Robert G. Isaac, University of Calgary, Canada

Compilation of References .............................................................................................................. 286

About the Contributors ................................................................................................................... 328

Index ................................................................................................................................................... 334

Detailed Table of Contents

Preface ................................................................................................................................................xiii

Acknowledgment ................................................................................................................................ xix

Section 1
Leadership

Chapter 1
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization ............................... 1
Alan M. Thompson, Production Services Network Ltd., Scotland

This chapter looks at the issues surrounding how to encourage the generation and manage the use of
innovation within the organizational environment of being a flat, matrix-shaped, international services
contractor. The influence of organizational structure on communication and trust is examined in com-
parison to traditional hierarchical-shaped organizations. The importance of organizational strategy,
particularly in terms of how that strategy is communicated and how to manage when events disrupt that
strategy, are looked at in detail. Organizational culture can rest on some more heavily than on others;
how those responsible for sustaining and promoting a culture of innovation can be supported is the next
layer analysis. Finally the skill sets required of managers are considered along with issues of motiva-
tion, influence and handling indirect sources of innovation. Illustrations of the issues and some solutions
in action are taken from the company Production Services Network, (PSN) to build a bridge between
academic theory and practical application.

Chapter 2
An Epistemology of Intellectual Capital and its Transition to a Practical Application ........................ 17
Jan Carrell, Northwestern College, Colorado Technical University, USA

Organization requirements for survival evolve reflective of the environment in which they exist. It has
been theorized the organizational tool for survival of the 21st century is intellectual capital. As with new
concepts the transition from theory to practical implementation is not without challenges. Intellectual
capital struggles with transitioning into the world of business. This chapter includes a limited study of
organizations in the Midwestern United States whose executives espouse a valuation of their organiza-
tions’ intellectual capital but have not bridged the gap from the theoretical understanding of intellectual
capital to the practical documentation of their organizational intellectual capital in practice. This finding
illustrates an estrangement between the academic field of theory and the practical implementation in
the organizations.

Chapter 3
Multinational Intellect: The Synergistic Power of Cross Cultural Knowledge Networks .................... 44
Leslie Gadman, London South Bank University, UK
Robert Richardson, Mental Health Associates, USA

The world of international business is experiencing transformations of such magnitude that existing
business models have become either invalid of incomplete. A fundamental force behind these disruptions
has been the emergence of the digital networked economy (Ridderstrale and Nordstrom 2004, Flores and
Spinosa, 1998) with its supporting internet and communications technology. One significant manifesta-
tion of this economy is the emergence of business models designed to gain competitive advantage by
bonding with customers, suppliers and complementors (Wilde and Hax 2001). From the multinational
perspective outsourcing and off - shoring have been the most common examples of this approach, but
user lead innovation models (von Hippel 2005) based on Open Source methods are rapidly emerging
as the leading source of competitive advantage. Commitment has been argued to play an important role
in determining the success of these relationships (Abrahamsson and Livari, 2002) suggesting that en-
trepreneurs must be adept at building and maintaining commitment based value networks (Allee 2004,
Sveiby and Roland 2002, Savage 1996, Gadman 1996, Adams 2004). This paper considers the challenges
associated with commitment in multinational value networking and finds them to be most problematic
in the diffusion of innovation where increasing levels of commitment are required across national
boundaries and cultures. (Mauer, Rai and Sali 2004). Current research into core commitment structures
of virtual multinational communities is not been well established. By analyzing data from a range of
sources the paper concludes that the success of value networks depends on the desire of participants to
acquire history - making identities (Gauntlett 2002, Spinosa et al. 1997) by maintaining identity defining
commitments across the network. Implications for theory and research are discussed.

Chapter 4
Dynamic Capabilities in R&D-Networks ............................................................................................. 58
Arla Juntunen, Helsinki School of Economics, Finland

This chapter addresses collaborative business networks at the level of industry/cluster networks, which
is important and relevant from the strategic management perspective in several industries. Collaborative
networks are seen to offer firms collective benefits beyond those of a single firm or market transaction.
The author of this chapter aims to contribute to the development of theories of knowledge management,
organizational learning and a resource-based view of the firm. The initial argument is that the character-
istics of the task that organizations try to accomplish through forming a specific collaborative network
influence the organization’s intellectual capital, the capabilities developed and required. This chapter is
based on a longitudinal case study in the ICT-sector.
 Section 2
Strategy

Chapter 5
Intellectual Capital Measurement and Reporting: Issues and Challenges
for Multinational Organizations ............................................................................................................ 75
Suresh Cuganesan, Swinburne University of Technology, Australia
Richard Petty, Macquarie University, Australia

Multinational organizations operate across a variety of complex competitive environments. Achieving

the right balance of global alignment and local flexibility is central to competitive success for these or-
ganizations. Viewed from an intellectual capital perspective, multinational organizations need to: design
and execute appropriate structures and systems (structural capital); engage and align its international
workforce (human capital); and, generate favourable relationships across the multitude of stakeholders it
interacts with globally (relational capital). But in pursuing these goals, a number of issues and challenges
are faced: How to make sense of intellectual capital investment decisions? How are they to communi-
cate intellectual capital priorities throughout the multinational business? And, with what tools are they
to measure and monitor investments and initiatives such that refinements and corrective action can be
made? In dealing with these issues, intellectual capital measurement and reporting practices can help.
This chapter presents the conceptual framework underpinning intellectual capital, discusses limitations
with traditional financial reporting models, outlines the benefits of intellectual measurement, and reports
and presents research on the perspective of finance professionals evaluating global companies.

Chapter 6
National Intellectual Capital Stocks and Organizational Cultures:
A Comparison of Lebanon and Iran ...................................................................................................... 95
Jamal A. Nazari, Mount Royal College/University of Calgary, Canada
Irene M. Herremans, University of Calgary, Canada
Armond Manassian, American University of Beirut, Lebanon
Robert G. Isaac, University of Calgary, Canada

Using a set of macro-level socio-economic indicators, we first explore whether two Middle Eastern
countries (Lebanon and Iran) provide the foundation for organizations to develop their intellectual capital
(IC). Then, we investigate the role of micro-level organizational characteristics that might support or
hinder the development of IC management processes within organizations. The insight gained through
our comparison will shed light on some important organizational attributes that foster the management
of IC for wealth creation. The analysis has important implications for multinational corporations (MNCs)
that have operations in the Middle East, are contemplating business involvement in the Middle East, or
that have employees with Middle Eastern origin.
Chapter 7
A Knowledge Management Framework to Manage Intellectual Capital
for Corporate Sustainability ................................................................................................................ 119
Herbert Robinson, London South Bank University, UK

The significant development in knowledge management (KM) literature in recent years is a reflection
of the growing interest to academics and practitioners/consultants involved in organizational change
and business transformation. Knowledge is a major source of competitive advantage and knowledge
assets/intellectual capital has to be managed effectively. The importance of implementing a knowledge
management strategy to understand the relationship between physical and intellectual capital, to increase
the market value of organizations and achieve corporate sustainability is examined. Using case studies
of construction organizations and applying the STEPS knowledge management framework, it was found
that there is a greater need for multinational organizations to implement KM. This is because they have
knowledge that is diverse and geographically dispersed across a network of organizations. It is concluded
that knowledge management has a catalytic role in developing intellectual capital to achieve corporate
sustainability. The STEPS framework will enable multinational organizations to identify the reform,
resource implications and the results of KM activities.

Chapter 8
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines ............. 136
Tomás M. Bañegil Palacios, Universy of Extremadura, Spain
Ramón Sanguino Galván, University of Extremadura, Spain

In line with the increasing importance of the intangible economy within the last few years, a higher number
of models have been published. In this sense, our main original contribution when measuring Intellectual
Capital is related to comparing and assessing the different existent Guidelines, unlike previous published
papers. The purpose of this paper is to present and compare some of the most recent and significant
contributions from researchers to the field of the measurement and management of intangibles.

Chapter 9
The Role of ICTs in the Management of Multinational Intellectual Capital ...................................... 144
Mirghani S. Mohamed, New York Institute of Technology, Bahrain
Mona A. Mohamed, New York Institute of Technology, Bahrain

This chapter aims to investigate the strategic importance of Information and Communication Technolo-
gies (ICTs) in the management of Intellectual Capital (IC) within a Multinational Company (MNC)
ecosystem. It provides a systematic multidisciplinary framework that defines the role of technology in
leveraging IC across borders and between headquarters and subsidiaries. The chapter addresses the tran-
substantiation of MNC into boundaryless Global Knowledge-Based Organization (GKB-MNC) which
ultimately propagates into Learning MNC (LMNC). The latter is a suggested MNC category that sustains
competitive advantage through systemic adoption of “Knowledge Iterative Supply Network (KISN)”
model proposed by the authors. The chapter suggests new multinational ICT/IC governance strategy that
handles the emerging complexities associated with modern intangible resource synthesis. In effect, these
complexities originate from the introduction of functionalities such as just-in-time knowledge supply,
elicitation of tacit knowledge, and leveraging of the core competencies for the creation and maintenance
of geographically distributed value proposition.

Chapter 10
The Link Between Learning Capability and Business Performance in MNEs:
The Role of Intellectual Capital .......................................................................................................... 160
Isabel Mª Prieto, Universidad de Valladolid, Spain
Elena Revilla, Instituto de Empresa, Spain

It is widely recognized that the development of learning capability is key to achieve a durable competitive
advantage. This is especially true in the context of MNEs. When MNEs operate in disparate host countries,
they enhance their knowledge bases, capabilities, and competitiveness through learning processes. The
analysis of the relevance of learning capability to improve business performance and, thus, the organi-
zational competence has been an important issue developed in literature. This chapter explains the link
between learning capability and the improvement of business performance by comparing how the main
dimensions of learning capability –knowledge resources and learning processes- impacts on performance,
in terms of both non-financial and financial performance. It is argued that those MNEs with the highest
levels in both their knowledge resources and learning processes obtain a superior performance.

Section 3
Implementation

Chapter 11
Managing Corporate Responsibility to Foster Intangibles: A Convergence Model ........................... 178
Matteo Pedrini, Altis–Postgraduate School Business & Society, Italy

This chapter presents a model for the integrated management of Corporate Responsibility (CR) initia-
tives and intangible resources. The model defines an approach for structuring a company’s social efforts
(stakeholder management) in such a way as to increase competitiveness through the development of the
intangible resources. After having presented an analysis of the studies conducted on the benefits of CR
initiatives on the development of intangible resources, the text proposes a protocol for evaluating each
CR initiative according to the model.

Chapter 12
Intellectual Capital Management in Long-Lasting Family Firms: The DuPont Case ........................ 207
Rosa Nelly Trevinyo-Rodríguez, EGADE Campus Monterrey, México

How to acknowledge, manage and measure intangible strategic resources embedded in organizational
settings—such as intellectual capital—has been a widely discussed topic during the last two decades.
However, when referring to unique organizational forms such as family-owned or controlled firms,
the topic is understudied. Considering that approximately one third of S&P 500 are family-controlled
firms—i.e. DuPont—, which have survived beyond a lifetime, we ask ourselves how these long-lasting
family businesses managed to balance the strategic and parallel creation, development and use of their
intellectual capital both at the family and business levels in order to support growth and regeneration.
We introduce the ICFB-Family Wealth matrix in order to describe our findings.

Chapter 13
Knowledge Management and the Links to Human Capital Management:
Leadership, Management Capabilities and Sustainability .................................................................. 221
Marianne Gloet, Abu Dhabi Women’s College, UAE

This chapter explores various linkages between knowledge management (KM) and human capital man-
agement (HCM) in the context of developing leadership and management capabilities to support sustain-
ability. Based on the prevailing literature, a framework linking human resource management (HRM),
KM and HCM is applied to the development of leadership and management capabilities to support
sustainability. The framework identifies ways to promote sustainability through creating effective links
between KM and HCM by which organizations can develop their leadership and management capabili-
ties to support sustainability across business, environmental and social justice contexts. This approach
provides managers with a framework for addressing sustainability issues and for developing individual
and organizational capabilities to support sustainability through KM and HCM practices.

Chapter 14
Building and Maintaining Human Capital with Learning Management Systems .............................. 234
Tom Butler, University College Cork, Ireland
Audrey Grace, University College Cork, Ireland

In this chapter we examine how building, integrating and maintaining human capital with Learning
Management Systems acts as an enabler for the management if intellectual capital within multinational
organizations. We draw upon learning theory and training practices to demonstrate that human capital
is best viewed through a competence lens; that is, accounting for human capital should focus on matters
of individual and organizational competence, and that the development of human capital is, in essence,
an exercise in competence development, which involves training and learning. This, then, is this chap-
ter’s point of departure in understanding how IT-based systems can enable training and foster learning,
thereby building an organization’s human capital.

Chapter 15
Multinational Companies and Their Link to the Intellectual Capital of Territories: A Proposal
of a Tool to Evaluate the Sustainable Development of the Region through its Intangible Assets ...... 249
Agustín J. Sánchez Medina, University of Las Palmas de Gran Canaria, Spain

Nowadays it seems to be widely accepted that a multinational company has many different environmen-
tal, economic or social impacts on a territory. Moreover, every region has the right to aim to achieve
sustainable development. For those reasons, this work proposes a tool based on the territory’s intangible
assets. This tool allows the management of the sustainable development of a region where a multinational
company has located, paying special attention to the way that this type of company can influence the
development of the region.
Chapter 16
International New Ventures, Organization Structure, and IC Management ....................................... 271
Irene M. Herremans, University of Calgary, Canada
Robert G. Isaac, University of Calgary, Canada

Flare Solutions Limited is an entrepreneurial international new venture (INV). Of particular interest is
the manner in which the firm developed a strategy by combining a special set of resources to provide
knowledge products to markets in various countries. The firm realized early on that its knowledge, sys-
tems, and relationships were to be the keys to its success. With this in mind, the founding partners took
steps to ensure that the firm’s structure and controls were conducive to management of its intellectual
capital (IC). The chapter discusses the formation of the INV and the management of its IC in special
ways to sustain its entrepreneurial activity. In part, this involved creating management processes con-
sistent with its objective of creativity and innovation for the broad purpose of knowledge development.
Consequently, the firm has been able to mobilize its IC to sustain its competitive edge in providing
knowledge services.

Compilation of References .............................................................................................................. 286

About the Contributors ................................................................................................................... 328

Index ................................................................................................................................................... 334

 xiii

Preface

The focus of this book as the title alludes to is the implementation, management and utilization of intel-
lectual management strategies within multinational organizations. The objective of the text is to describe
best practices with the aim to enable the reader to employ strategies to best utilize the intellectual capital
contained within the organization and to avoid some of the less obvious pitfalls in managing that intel-
lectual capital within the multinational setting.
As the title infers, there is a distinction drawn between managing intellectual capital in a single site or
single country setting and that of at a multinational level. Not only is there additional levels of complexity
associated with management across national borders, there are also significant differences in the way in
which intellectual capital is viewed from culture to culture. Despite the fact that we live in a relatively
technologically connected era, technology and communications are not necessarily the solution in their
own right to the management of intellectual capital from one culture to another. As an example, the value
associated with relationship capital, the value associated with close ties to business partners, whether
they be suppliers, customers and to a certain extent competitors, differs from culture to culture. Close
ties to suppliers may be valued in one culture, but have significantly less value in others.
In addressing intellectual capital management within the multinational setting, we have taken the
approach of viewing this from three perspectives, Leadership, Strategy and Implementation, hence the
book is broken into three major sections. Technology proliferates these sections as an integral part of
the management of intellectual capital, but in today’s environment it can be viewed as an enabler as
opposed to necessarily requiring a distinct strategy for the management of such capital. That said there
are distinct systems that do exist for managing intellectual capital such as Customer Relationship Man-
agement (CRM) systems.

Leadership

As with the deployment of any new system or process within an organization, leadership is both neces-
sary from a support perspective (the buy-in of the leadership of the organization at the appropriate level),
from a direction setting perspective (aligning the new system or process with the strategic direction of
the organization) and from a sustainability perspective to ensure that the process or system stands the test
of time. This is even more essential in the multinational context where trust, culture and understanding
managing intellectual capital within an organization may be misunderstood.
Within the Leadership Section we examine four broad areas that impact the management of Intellec-
tual Capital within the multinational; facilitating the use of intellectual capital, making the management
of intellectual capital practical, working with cross cultural networks and leadership.
xiv

In Chapter 1, Thompson looks at the issues surrounding encouraging the generation of intellec-
tual capital and the management of innovation within the organizational environment. Organizational
structures included in the review include flat, matrix and international services sector. The influence
of organizational structure on communication and trust is examined in comparison to traditional hier-
archical-shaped organizations. The importance of organizational strategy, particularly in terms of how
that strategy is communicated and how to manage when events disrupt that strategy, are looked at in
detail. Organizational culture can rest on some more heavily than on others; how those responsible for
sustaining and promoting a culture of innovation can be supported is the next layer analysis. Finally the
skill sets required of managers are considered along with issues of motivation, influence and handling
indirect sources of innovation. Illustrations of the issues and some solutions in action are taken from the
company Production Services Network, (PSN) to build a bridge between academic theory and practical
application.
In Chapter 2 Carrell looks at the management of intellectual capital within the environmental con-
text in which it exists. It has been theorized the organizational tool for survival of the 21st century is
intellectual capital. As with all new concepts, the transition from theory to practical implementation is
not without challenges. Intellectual capital struggles with transitioning into the world of business. This
chapter includes a limited study of organizations in the Midwestern United States whose executives
espouse a valuation of their organizations’ intellectual capital but have not bridged the gap from the
theoretical understanding of intellectual capital to the practical documentation of their organizational
intellectual capital in practice. This finding illustrates an estrangement between the academic field of
theory and the practical implementation in the organizations.
Gadman and Richardson, in Chapter 3, discuss the driving forces behind the magnitude of transforma-
tions that have driven existing business models to become either invalid of incomplete pertaining to the
management of intellectual capital. Fundamental to these changes is the emergence of the digital networked
economy with its supporting internet and communications technology. One significant manifestation of
this economy is the emergence of business models designed to gain competitive advantage by bonding
with customers, suppliers and complementors. From the multinational perspective, outsourcing and
off - shoring have been the most common examples of these approaches. User lead innovation founded
upon Open Source methods are rapidly emerging as the leading source of competitive advantage. This
chapter considers the challenges associated with commitment in multinational value networking and
finds them to be most problematic in the diffusion of innovation where increasing levels of commitment
are required across national boundaries and cultures. Current research into core commitment structures
of virtual multinational communities has not been well established, however, it is important to have and
understanding of the current state of play in terms of research in the area in order to enhance the sustain-
ability of intellectual capital management initiatives within the multinational organization.
Following on from Gadman and Richardson’s work on cross cultural knowledge networks, Juntunen
further discusses the management of intellectual capital within the research and development environment.
Chapter 4 addresses collaborative business networks at the level of industry/cluster networks, which is
important and relevant from the strategic management perspective in several industries. Collaborative
networks are seen to offer firms collective benefits beyond those of a single firm or market transaction.
The author of this chapter aims to contribute to the development of theories of knowledge management,
organizational learning and a resource-based view of the firm. The initial argument is that the character-
istics of the task that organizations try to accomplish through forming a specific collaborative network
influence the organization’s intellectual capital, the capabilities developed and required. This chapter is
based on a longitudinal case study in the ICT-sector.
 xv

Strategy

In the second section of this text we examine the role of strategy in the successful implementation of
intellectual capital management programs. Because of the very nature of managing intellectual capital
within a multinational environment, significant aspects of any strategy for the implementation of such
an initiative must incorporate significant aspects of education to those who’s intellectual capital is being
managed. This is due to a large degree to cultural differences from location to location as well as dif-
ferences in innate opinions as to what has value as intellectual capital. As such we examine the role of
strategy in managing intellectual capital within the multinational environment by looking at techniques
for the measurement and reporting of intellectual capital. We then look at the impact of national culture
in terms of both national and organizational perspective. In doing so we take the example of contrasting
two locations, that of Lebanon and Iran.
In the latter part of this section we examine the role of intellectual capital management in corporate
sustainability, the role that technology plays in the development of intellectual capital management
strategy, how intellectual capital management plays into the learning organization within the multina-
tional context.
In Chapter 5, Cuganesan and Petty review how achieving the right balance of global alignment and
local flexibility is central to competitive success for multinational organizations organizations. Viewed
from an intellectual capital perspective, multinational organizations need to: design and execute appro-
priate structures and systems (structural capital); engage and align its international workforce (human
capital); and, generate favorable relationships across the multitude of stakeholders it interacts with glob-
ally (relational capital). But in pursuing these goals, a number of issues and challenges are faced: How
to make sense of intellectual capital investment decisions? How are they to communicate intellectual
capital priorities throughout the multinational business? And, with what tools are they to measure and
monitor investments and initiatives such that refinements and corrective action can be made? In dealing
with these issues, intellectual capital measurement and reporting practices can help. This chapter pres-
ents the conceptual framework underpinning intellectual capital, discusses limitations with traditional
financial reporting models, outlines the benefits of intellectual measurement, and reports and presents
research on the perspective of finance professionals evaluating global companies.
Nazari et al in Chapter 6 demonstrate the use of a set of macro-level socio-economic indicators in
determining appropriate intellectual capital management strategy. They first explore whether two Middle
Eastern countries (Lebanon and Iran) provide the foundation for organizations to develop their intel-
lectual capital (IC) at the national level. Then, they investigate the role of micro-level organizational
characteristics that might support or hinder the development of IC management processes within orga-
nizations. The insight gained through our comparison will shed light on some important organizational
attributes that foster the management of IC for wealth creation. The analysis has important implications
for multinational corporations (MNCs) that have operations in the Middle East, are contemplating busi-
ness involvement in the Middle East, or that have employees with Middle Eastern origin.
In Chapter 7, Robinson discusses the significant development in knowledge management (KM) lit-
erature in recent years as a reflection of the growing interest to academics and practitioners/consultants
involved in organizational change and business transformation. Knowledge is a major source of competi-
tive advantage and knowledge assets/intellectual capital has to be managed effectively. The importance
of implementing a knowledge management strategy to understand the relationship between physical and
intellectual capital, to increase the market value of organizations and achieve corporate sustainability is
xvi

examined. Using case studies of construction organizations and applying the STEPS knowledge man-
agement framework, it was found that there is a greater need for multinational organizations to imple-
ment KM. This is because they have knowledge that is diverse and geographically dispersed across a
network of organizations. It is concluded that knowledge management has a catalytic role in developing
intellectual capital to achieve corporate sustainability. The STEPS framework will enable multinational
organizations to identify the reform, resource implications and the results of KM activities.
Chapter 8 discusses the increasing importance of the intangible economy within the last few years,
a higher number of models have been published. In this sense, our main original contribution when
measuring Intellectual Capital is related to comparing and assessing the different existent Guidelines,
unlike previous published papers.
Palacios and Galvan present and compare some of the most recent and significant contributions from
researchers to the field of the measurement and management of intangibles.
Chapter 9 aims to investigate the strategic importance of Information and Communication Technolo-
gies (ICTs) in the management of Intellectual Capital (IC) within a Multinational Company (MNC)
ecosystem. It provides a systematic multidisciplinary framework that defines the role of technology
in leveraging IC across borders and between headquarters and subsidiaries. The chapter addresses the
transubstantiation of MNC into boundaryless Global Knowledge-Based Organization (GKB-MNC)
which ultimately propagates into Learning MNC (LMNC). The latter is a suggested MNC category that
sustains competitive advantage through systemic adoption of “Knowledge Iterative Supply Network
(KISN)” model proposed by the authors.
Mohamed et al suggests new multinational ICT/IC governance strategy that handles the emerging
complexities associated with modern intangible resource synthesis. In effect, these complexities origi-
nate from the introduction of functionalities such as just-in-time knowledge supply, elicitation of tacit
knowledge, and leveraging of the core competencies for the creation and maintenance of geographically
distributed value proposition.
In Chapter 10 Prieto and Revilla discuss the role of intellectual management within the multinational
organization in the context of the learning organization and the strategies that the learning organization
requires. It is widely recognized that the development of learning capability is key to achieve a durable
competitive advantage. This is especially true in the context of MNEs. When MNEs operate in disparate
host countries, they enhance their knowledge bases, capabilities, and competitiveness through learning
processes. The analysis of the relevance of learning capability to improve business performance and,
thus, the organizational competence has been an important issue developed in literature. This chapter
explains the link between learning capability and the improvement of business performance by comparing
how the main dimensions of learning capability –knowledge resources and learning processes- impacts
on performance, in terms of both non-financial and financial performance. It is argued that those MNEs
with the highest levels in both their knowledge resources and learning processes obtain a superior per-
formance.

Implementation

In the final section of the book we examine the implementation strategies for achieving sustainability
and success in the deployment of intellectual capital management across multinational organizations.
We have devoted six chapters to this aspect. As implementation strategies are required inevitably to be
tailored to the organization that the strategy is being implemented within and the tailored approach is
 xvii

even more significant with a multinational context, the approach that we have taken within this text
is to discuss considerations and demonstrate through examples, how intellectual capital management
strategies can be implemented within the multinational context.
In Chapter 11, Pedrini presents a model for the integrated management of Corporate Responsibility
(CR) initiatives and intangible resources. The model defines an approach for structuring a company’s
social efforts (stakeholder management) in such a way as to increase competitiveness through the de-
velopment of the intangible resources. After having presented an analysis of the studies conducted on
the benefits of CR initiatives on the development of intangible resources, the text proposes a protocol
for evaluating each CR initiative according to the model.
Chapter 12 strategizes on the implementation of intellectual capital and discusses how to acknowl-
edge, manage and measure intangible strategic resources embedded in organizational settings—such
as intellectual capital—has been a widely discussed topic during the last two decades. However, when
referring to unique organizational forms such as family-owned or controlled firms, the topic is under-
studied. Trevinyo-Rodríguez considers that approximately one third of S&P 500 are family-controlled
firms—i.e. DuPont—, which have survived beyond a lifetime, we ask ourselves how these long-lasting
family businesses managed to balance the strategic and parallel creation, development and use of their
intellectual capital both at the family and business levels in order to support growth and regeneration.
We introduce the ICFB-Family Wealth matrix in order to describe our findings.
In Chapter 13 Gloet explores various linkages and implementation strategies between knowledge
management (KM) and human capital management (HCM) in the context of developing leadership and
management capabilities to support sustainability. Based on the prevailing literature, a framework linking
human resource management (HRM), KM and HCM is applied to the development of leadership and
management capabilities to support sustainability. The framework identifies ways to promote sustain-
ability through creating effective links between KM and HCM by which organizations can develop their
leadership and management capabilities to support sustainability across business, environmental and
social justice contexts. This approach provides managers with a framework for addressing sustainability
issues and for developing individual and organizational capabilities to support sustainability through
KM and HCM practices.
Butler and Grace discuss building and maintaining human capital with learning management systems
in Chapter 14. It is now clear that building and maintaining a firm’s human capital through organizational
learning represents the only sustainable source of competitive advantage. They illustrate that the stra-
tegic resources which underpin the success of business enterprises include an organization’s physical,
human, and organizational capital. Physical capital includes plant and equipment, geographic location,
and access to raw materials. Human capital includes the training, experience, judgment, intelligence,
relationships, and insights of managers and workers. Organizational capital includes firm structure and
processes, internal and external relations, both formal and informal. This chapter argues that human
capital can be enhanced through the application of IT (as physical capital) and organizational learning
processes (organizational capital).
Based upon the research and examples discussed thus far, it seems to be widely accepted that a
multinational company has many different environmental, economic or social impacts on a territory.
Moreover, every region has the right to aim to achieve sustainable development. In Chapter 15, Medina
discusses those reasons and proposes a tool based on the geographic area’s intangible assets. This tool
allows for the implementation of strategies for the sustainable development of a region where a multina-
tional company has located, paying special attention to the way that this type of company can influence
the development of the region.
xviii

Finally, in Chapter 16 we look at an example of how such an implementation may be accomplished.

Flare Solutions Limited is an entrepreneurial international new venture (INV). Of particular interest is
the manner in which the firm developed a strategy by combining a special set of resources to provide
knowledge products to markets in various countries. The firm realized early on that its knowledge, sys-
tems, and relationships were to be the keys to its success. With this in mind, the founding partners took
steps to ensure that the firm’s structure and controls were conducive to management of its intellectual
capital (IC). The chapter discusses the formation of the INV and the management of its IC in special
ways to sustain its entrepreneurial activity. In part, this involved creating management processes con-
sistent with its objective of creativity and innovation for the broad purpose of knowledge development.
Consequently, the firm has been able to mobilize its IC to sustain its competitive edge in providing
knowledge services.

ConClusion

Through this text, we have brought together the thought leaders and researchers involved in the devel-
opment of strategic intellectual capital in multinational organizations. There are a number of significant
conclusions that can be reached in terms of how intellectual capital management is progressing as a
practice.
The first conclusion is that should intellectual capital management be embarked upon within a mul-
tinational organization, it must be done at the strategic level. The complexities of implementing such
strategies requires that require that leadership at the highest levels be involved in championing such
initiatives and that management at all affected levels be involved and have appropriate e buy-in.
Secondly, the implementation of such initiatives needs to be consistent yet context sensitive. In
other words, a strategy for valuing and reporting intellectual capital assets needs to be universal within
the organization, but needs to encompass the actual situation on the ground at locations in which the
organization operates in order to overcome issues such as trust, culture and perceptions of misuse of
such capital once codified.
Thirdly, there are distinct benefits for not only the organizations that employ intellectual capital
techniques, but also for the locations that the organization operates within. Such techniques can lead to
greater Corporate Social Responsibility (CSR) better learning within the organization at the local level
as well as tighter integration with the local environment leading to heightened competitive advantage.
While technology is certainly a driver for intellectual capital management, it cannot be seen as the
end result. Technology is an enabler and for organizations, allows for the management of intellectual
capital in ways that have thus far not been possible. Of note is that technology acting as an enabler, does
not in itself dictate that intellectual capital management initiatives are sustainable.
The management of intellectual capital within multinational organizations certainly has payoffs
measured in both level of innovation and competitive advantage. Hopefully after reviewing this text,
the reader will have significant insight into how to strategically implement strategies that work in their
environment and avoid some of the pitfalls of such an implementation.
 xix

Acknowledgment

I would like to personally acknowledge and thank all of the contributing authors for their hard work and
the quality of research that went into every chapter of this text. Without the contribution of such thought
leaders, research into this field would not be as advanced as it has become.
Similarly, I would like to acknowledge and thank all of the countless individuals that have contributed
to the success of this book, including those who have offered suggestions and guidance and of course
those that have acted as reviewers.
Finally I would like to thank all those at IGI Global for making the process of getting this book from
concept to the book that you are reading such an intellectually rewarding process.

Kevin J. O'Sullivan
New York Institute of Technology, USA
 Section 1
Leadership
 1

Chapter 1
Facilitating the use of
Intellectual Capital in a Matrix
Multinational Organization
Alan M. Thompson
Production Services Network Ltd., Scotland

ABsTRACT
This chapter looks at the issues surrounding how to encourage the generation and manage the use of
innovation within the organizational environment of being a flat, matrix-shaped, international services
contractor. The influence of organizational structure on communication and trust is examined in com-
parison to traditional hierarchical-shaped organizations. The importance of organizational strategy,
particularly in terms of how that strategy is communicated and how to manage when events disrupt
that strategy, are looked at in detail. Organizational culture can rest on some more heavily than on
others; how those responsible for sustaining and promoting a culture of innovation can be supported is
the next layer analysis. Finally the skill sets required of managers are considered along with issues of
motivation, influence and handling indirect sources of innovation. Illustrations of the issues and some
solutions in action are taken from the company Production Services Network, (PSN) to build a bridge
between academic theory and practical application.

inTRoDuCTion tion – the creation of new knowledge – is essential

Two relatively modern concepts like intellectual
capital (IC) and matrix multinational organiza-
tion might sound like an ideal partnership. This
chapter looks at the tensions and benefits within
that partnership, and some ways of capitalizing
on them. In knowledge-based industries, innova-
DOI: 10.4018/978-1-60566-679-2.ch001
for survival and growth. Facilitating innovation
and managing the intellectual capital engendered
along the way is a challenge, but when placed in
the context of differing organizational structures,
cultures and technological and economic trends, it
may seem hard to know where to start. By looking
at a service company, contracted to customers, in a
matrix-shaped organization spread around the globe,
this chapter addresses several layers of complexity

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
and illustrates the points with examples from the
company itself. The discussion moves from issues
associated with the matrix structure, through the
impact made by organisational strategy and how
that strategy is communicated, to human factors
and issues of organisational culture, before look-
ing finally at the skills sets required by managers
working within such organisations and attempting
to meet strategic demands for greater facilitation
of intellectual capital. To help the reader gain an
understanding of the contextual setting of the
chapter, some definitions of the terms used are
given below.
BACKGRounD
Definitions
Intellectual Capital
The Delphi Group White Paper (2001), drawing
upon the work of Edvinsson offers a useful defini-
tion, paraphrased as follows.
IC can be segmented into three sub-categories:
Human Capital, Structural Capital and Customer
Capital. Each of these can be considered as valu-
able assets of an organization in a rather similar
way to that of ‘goodwill’ on that organization’s
balance sheet. Human Capital is the organization’s
‘know-how’, Structural Capital may be considered
as the organizations systems or work processes,
and Customer Capital as its relationship with its
customers.
Matrix Organization
The matrix organizational model is one in which
most individual knowledge workers have dual
lines of reporting. On the one hand they are re-
sponsible to a business manager or team leader
for the delivery of work activities, whilst on the
other are responsible to a discipline or functional
chief in terms of their work methods and compe-
2
tency improvement plans. It is often convenient
to display this structure as a matrix of rows and
columns. (Fig. 1)
Oil Major
Oil major is the industry term for the larger oil and
gas operating companies, e.g. Shell, BP, Exxon
and the like. These operate on a global scale and
include both national and international organiza-
tions. A useful description of the development
of the oil majors can be found in Yergin (1991).
To the oil and gas support industry these are the
customers.
Function / Discipline Chief
Function / discipline chiefs lead cross project as-
signment personnel from a function or discipline
point of view. They are the guardians of compe-
tency levels, ‘owners’ of business procedures, and
where appropriate are also technical authorities
in their respective fields. For example, in the oil
and gas industry, such professional disciplines will
include chemical process, structural, electrical,
safety and environmental engineering, and also
the supporting functions such as project manage-
ment, planning, cost control and so on.
Project Assignment Team manager
Project assignment team managers lead their re-
spective teams, which vary in terms of personnel
numbers and skills set mix depending upon the
work required. These managers are responsible for
sound leadership of their team, and accountable
to senior management for the delivery of service
to the customer.
Project Assignment Team.
A project assignment team is the industry term
used to describe a group of people with a wide
variety of skill sets dedicated or assigned to sup-
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
Figure 1. Production Services Network Organizational Design
port a specific oil or gas production asset or group
of assets for a particular client.
Literature Review
This chapter cites literature sources mainly from
a practitioner standpoint, and also draws some
parallels from knowledge capture and knowledge
transfer because many organizational behavioral
patterns related to these two topics have similari-
ties to those associated with IC. Reference is also
drawn from the field of organizational develop-
ment related to matrix organizational structures.
Both of these main reference streams offer
some guidance for those engaged in managing
IC in a sustainable way within today’s knowledge
intensive business environment.
The matrix organizational design is typical
amongst the more progressive and responsive
organizations within the support sector of the oil
and gas industry, because the work to be carried
out for each customer is broadly similar but the
resource demands throughout the duration of a
contract, and contract locations, vary. By organiz-
ing on the matrix principle, such companies are
able to provide and manage appropriate resources
from their entire organization to support multiple
customers irrespective of asynchronous time-
zones or geographical locations.
PSN provides oil and gas companies with
operational support for their production platforms
and processing facilities around the world. For
over 20 years the company was a wholly-owned
subsidiary of the global support company Kellogg,
Brown & Root, in turn part of the Halliburton
Company, headquartered in Houston, Texas. PSN
was purchased by its management team in May
2006 and continues to operate on a global basis
from its headquarters in Aberdeen, Scotland.
PSN has built upon those 20 years and has since
experienced considerable expansion particularly
over the last five years, mainly by developing its
non-UK business. It currently has around 8000
employees working in more than twenty coun-
3
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
tries across five continents and is organized on
the matrix principle to provide the core business
services of engineering, maintenance and opera-
tion services to customers.
Innovation within each contract brings addi-
tional value to both the customer and the service
company. One advantage for the customer is
being able to apply the innovation early; for the
service company advantage is gained by having
some genuine application to test the innovation
on, and so develop proofs that can be used to sell
the innovation to more customers.
However there is a certain amount of duality
over new ideas in the oil and gas industry, which
is also common in many other industries. On the
one hand, each oil and gas major likes to be seen
as innovative and keen to adopt new ideas or work
methods but on the other hand the majors are
frequently risk-averse: many would prefer to be
second rather than first! This may be partly related
to a traditional culture of punishing failure, which
tends to make innovators uneasy. Many would-be
innovators in this industry would agree with the
sentiment expressed by Machiavelli (1513).
“…there is nothing more difficult to take in hand,
more perilous to conduct, or more uncertain in
its success, than to take the lead in a new order
of things. Because the innovator has for enemies
all those who have done well under the old condi-
tions and lukewarm defenders in those who may
do well under the new”.
WHY is THE oRGAniZATion
MoDElED in THE FoRM
oF A MATRiX?
This section covers the reasoning behind why an
organization might select a matrix design over
more traditional designs, and the impact that
choice of organizational structure has on facilitat-
ing intellectual capital.
4
In PSN’s matrix organizational design (Fig. 1)
the horizontal rows represent support functions
or engineering disciplines, and people with their
respective specific skill sets, whilst the vertical
columns represent the various project team assign-
ments, generally aligned with a specific client or
oil/gas field development.
Within such an organizational structural design,
it is the task of the discipline and function chiefs to
input advice and experience on resourcing to fill
the jobs with suitably competent individuals, to
be guardians of good practice, to deliver updated
methods to their functional personnel, and garner
good practice and new ideas from the network.
Facilitating the Development
of intellectual Capital
Those involved with the development and man-
agement of intellectual capital need to be aware
of specific dynamics and aim not only to avoid
stifling ideas offered from individual knowledge
workers, but also to nurture them. As Tapscott
and Williams (2007) put it:
“The production of knowledge, goods, and ser-
vices is becoming a collaborative activity in which
growing numbers of people can participate. This
threatens to displace entrenched interests that
have prospered under the protection of barriers
to entry, including the high costs of obtaining the
financial, physical, and human capital necessary
to compete”.
To discuss these entrenched interests and
specific dynamics in a matrix organization, it
is worthwhile to briefly examine the more tra-
ditional hierarchical structures often found in
many organizations, for comparison purposes.
In a hierarchical or ‘family tree’ model, there is
a danger that prejudiced opinion, however well-
intended, will stifle innovative ideas or individuals
who may be thinking differently from the chief
or simply outside conventional solutions. On
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
occasions the discipline or function chief may
be over-cautious, biased or not completely up
to date. In a hierarchical model, all communica-
tions tend to pass over the desk of the chief, and
thus the chief can exert his authority to prevent
the progress of what he sees as deviant ideas, or
simply not endorse them, in effect damming them
with faint praise. Prevarication can be a powerful
tool to block change too, and simply being slow
to offer opinion can send a very negative signal.
In many organizations, the emergence of a new
idea immediately overloads someone, often the
subject matter expert, with an additional and
unwelcome task in reviewing it. All these factors
make the survival of the idea uphill from the start,
unless the organization’s processes are designed
to accommodate innovation.
It is unlikely that many organizations, apart
perhaps from those engaged primarily in research
and development activity, for example, the phar-
maceutical industry, will actually be organized
around the need to nurture the development of
new ideas and hence IC. In general, then, whilst
organizing on the matrix principle is not likely to
be done just for the purpose of facilitating inno-
vation and to increase the IC of the organization,
that model can, if managed appropriately, nurture
IC development more efficiently than traditional
models might.
Structure for Communication and Trust
Within a matrix organizational structure, some
managers are likely to expect responses on IC
issues to be managed in a similar fashion to issues
of an operational nature. That expectation might
however be misplaced because of the different
dynamics in an IC context. Whilst the matrix
model is often compared favorably to the hierar-
chical organizational model in terms of increased
flexibility and responsiveness of operation, this
difference requires different methods of managing
to unlock its potential advantages. Some of these
will be dependent upon the overall culture of the
organization and it’s tolerance of ideas; studies
that look at conditions supportive of innovation
are discussed later. From the perspective purely of
organizational structure though, the ability to sup-
port two-way communication is vital. The quality
of communication is important too, as Davenport
& Prusak (1998) noted in their description of the
transfer of know-how between tunnel engineers in
Wellington, New Zealand and Boston, USA, yet
each group was working for the same company!
In PSN, while seniority lies with the discipline
chiefs for operational activities, for intellectual
capital there is generally more of a two-way dis-
cussion flow between ‘equals’, rather than of the
expert mentor/student type. This follows the broad
principle that innovation is not the sole province
of the subject matter expert. Not every organiza-
tion has recognized that important principle. For
example, Collison (2006) cites a government de-
partment which had gone to a great deal of effort
to ensure the names of individuals were always
highlighted in contributions to online documents
to encourage people to contact each other, but
also included the rank of the contributor. “When
I asked why, I was told that it was to prevent the
embarrassing situation where someone might call
someone of a higher grade, which undermines
what they’re trying to do.” Facilitating intellectual
capital must embody the principle that a good
idea is still a good idea, irrespective of where it
came from.
Where an industry is populated by a high per-
centage of people with diverse career backgrounds
or has a high turnover rate, the need for openness
in communication is even more so. This is em-
phasized in times of global expansion and during
some of the cyclical fluctuation periods.
The oil and gas industry has always been
cyclical (Yergin, 1991). For the support sector of
the industry, this means managing the peaks and
troughs associated not only with the oil price but
with varying demand for gas, which has become
more of an internationally traded commodity in
recent times. Cyclicality also affects asset main-
5
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
tenance and modifications work, as the discov-
ery of new oil fields has slowed but not ceased,
while increased innovation is required to extend
the production of life of older fields, particularly
when the oil price is high.
In the light of this cyclicality, there is a busi-
ness need to move people and sometimes the
execution of activities around efficiently, while
ensuring all people are all suitably competent,
experienced, and informed for each project as-
signment. An oil and gas engineering company
attracts engineers from many different industries
and many bring transferable solutions with them,
rather as medieval trainee artisans travelled from
place to place gaining and imparting knowledge,
from which the term ‘journeyman’ comes.
Within contracting organizations the two-way
flow may have to extend beyond the company,
to include the customer. This happens when the
development of IC may include proprietary issues
involving the customer, such as might occur when
the service company and customer are working in
some form of partnering or alliance arrangement,
and sharing the costs and benefits of an innovation.
There is the potential for tension here, of course,
in the event that the customer subsequently wants
to claim IC rights on a jointly developed innova-
tion, not necessarily to commercially exploit the
innovation, but possibly to prevent or delay the
use of it by competitors.
In the open culture of the matrix model, com-
munication working across parts of the organiza-
tion is more likely to be the norm and there is
considerably less gatekeepering and bottlenecks
caused by bureaucratic process. Indeed, where
there is already an overall collaborative ethos,
there is a greater likelihood of collaboration
over IC, despite the dynamics being different to
collaboration over operational issues. The open
approach obviously tends to spread the initial
review by tapping directly into the functional
‘horizontal’ line of people, notionally a peer group
or community of practice, for feedback and pos-
sibly support.
6
Geographical spread of an organization will
impact the gathering of IP in a number of ways
apart from the practical ones of time zones and
languages. A multinational organization has di-
versity not only in terms of people and cultures,
but also in inter-person trust levels, arguably made
more complex because of the very diversity that
can bring such value to the business in many other
ways. These differences can be seen as a threat
or an opportunity, and yet one of the features of
multinational organizations is the value of those
different perspectives on sharing and validating
intellectual capital.
The matrix-shaped structure also creates
different leadership dynamics. The behavior of
managers is one of the important factors cited by
Ekvall (1996) in the context of setting a supportive
climate within which innovation may thrive.
“It is true that the manager’s attitudes and be-
havior are important both as a part of the climate
and as a general influence on it”.
Further, the supportive climate sought for will also
be required to ensure some measure of sustain-
ability in developing IC.
Alignment with The strategic
Business intent
The business drivers for the organization are
important in terms of IC because some if not all
of them will drive development of the strategic
use of IC. Of almost equal importance though, is
how management articulates its strategic direc-
tion, as this impacts upon how intellectual capital
is handled. These issues are considered in this
section, against a backdrop of a relatively volatile
business environment.
Articulation of strategic direction informs
employees about which business activity areas
are likely to require new ideas; where intellectual
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
capital management will be needed to satisfy the
aims of the organization, and it guides employees
on what sort of innovation is likely to be taken up
for development by the organization. For example,
personnel in some oil and gas support organiza-
tions may see the resurgence of the UK nuclear
industry and development of offshore wind farms
as a potentially profitable line of business. PSN
has ensured that its resources remain focused by
using email, intranet and film to share its five year
strategy internally, which makes clear that these
developments are not seen as strategic impera-
tives at present.
Any organization having a strategic intent of
developing innovation methods and hopefully
innovative outcomes needs to make that intent
clear to the organization’s population; to maximize
the benefit of the innovation strategy it should be
transparently aligned with the overall business
intent. For example, PSN, being a newly formed
entity following the management buy-out, took
the opportunity to reiterate the company strategy
for innovation in terms of core values, referred
to internally as “PSN’s DNA”. One core value
relevant to the subject of intellectual capital and
entitled ‘Innovation’ is given below.
“We actively look for better ways of doing things,
never satisfied with ‘good enough’. Our culture
encourages people to collaborate, share ideas
across our network and learn from each other.
We recognise that not all innovations succeed
but we test ideas quickly and learn early without
taking large risks.
Our people are at the core of innovation. Applying
ideas that improve tools, processes and systems
only work because our people have the skills
and attitudes that embrace innovation and keep
it moving forward”.
Source: PSN ‘Joining the Network’ (2006)
– An induction booklet about PSN given to all
new employees. Another of PSN’s core values is
Integrity, which centers upon acting openly with
employees and others – another reason to share
the operational strategy with personnel.
Disruptive Events
Managers must also manage according to the pre-
vailing business environment and be observant of
disruptive events. Disruptive events, despite the
connotation of the term, need not be bad ones; his-
tory suggests disruption often leads businesses on
to innovate in response. The invention and stellar
growth of mobile telephony or the internet offer
good examples of the new inventions. In the for-
mer, landline companies’ diversified into mobile
telephony, Indeed, Portio Research (2007) report
that “…since the first mobile telephones reached
the hands of consumers at the end of the 1980’s, it
took approximately 15 years for the first 25% of the
human race to subscribe to mobile services, then
the next 25% look set to sign up in just four short
years. By mid 2008 the world is forecast to cross
the highly significant 50% penetration mark.”
In the latter, the Internet has made a wealth of
services available to those for whom a traditional
post office is inaccessible. It has allowed postal
services to focus on developing package delivery
services, possibly of goods ordered via the Internet,
and thus offering a business opportunity instead
of only a business threat.
The following story from the writer’s experi-
ence in warship building shows how a change in
business environment can inspire two potentially
conflicting innovative responses and illustrates
the need for timely communication of strategy
to sustain the success of an organization. On a
warship, submarine detection requires a dome-like
structure to be fitted below the keel. This cannot
be fitted until after the ship is launched, and is
generally done in a dry dock. In the river Clyde
shipbuilding area during the mid-1970s, there
were two dry docks competing with each other for
business from both river traffic and the other 14
7
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
shipyards in the area. An economic downturn led
to the closure of one dry dock, leaving the other
to increase prices unchallenged, which it lost no
time in doing. Some shipwright technicians de-
vised a clever plan to install the underwater dome
using a watertight structure slung underneath the
ship after launch, thus avoiding the need to use
the exploitative dry dock. They told the manage-
ment of their shipyard about this innovation. The
management listened but did not seem to be acting
on the idea, even though it clearly saved costs.
The shipwrights were puzzled and frustrated at
this attitude. A few weeks later, the management
called the shipwrights in to the boardroom and
revealed in confidence they had been negotiating
with the owners of the last remaining dry dock
to purchase it, hence their apparent prevarication.
They wanted to explain to their innovative team
what was going on, and thank them for their idea,
yet needed to retain the confidentiality of the deal
to purchase the dry dock for a few more weeks.
In this example, the shipwrights had responded
to the disruptive event of the closure of the second
dry dock with a technical solution. The managers
had also responded with an equally innovative
solution, but could not make their strategic inten-
tion known publicly, yet recognized the long-term
value of sharing the news of the deal with the
shipwright team before it could become public
knowledge.
So, how are organizations in general likely to
respond to disruption in the context of innova-
tion? The responses of matrix and conventionally
organized organizational models may vary. Of
importance here is the relatively flat structure
characteristic of the matrix, because the very
structure, possibly encouraged by a culture of
cross–project collaboration over operational is-
sues, is likely to be a significant factor. If the
organization is operating relatively smoothly on
a daily basis with collaboration, then the impact
of a disruptive event is likely to be responded to
in a collaborative way too. Thus, we may draw
some parallels from the way operational issues are
8
dealt with apart from the additional influence of
the altered dynamics associated with IC.
The dynamics associated with handling of IC in
turn are likely to be influenced by the way people
behave, and the influence of human behaviors is
considered below.
WHiCH HuMAn FACToRs ARE
THE MoRE inFluEnTiAl?
Organizations do not invent, it is the people within
organizations who do that and so it is important
for those engaged in managing intellectual capital
to take notice of the human factors. This section
considers the considerable influence of human
behaviors on intellectual capital management.
There are many reasons why people invent
or innovate. One of the more powerful drivers
amongst these reasons might include an individ-
ual’s need to invent, rather as a writer must write
or a painter must paint. The difference between
the purely functional engineering design and the
elegant one can be seen, be it of an aircraft or a
bridge. Good design, like good style, is easy to
recognize but difficult to describe. Apart from
competency in design and innovation, the differ-
ence may be that of passion for the outcome. This
passion, like that of an artist, manifests itself in
the outcome of the design. Thus as the inventor
develops an idea he may become as passionate
about it as a painter would of his painting, and
that passion may well rub off onto those with
whom he shares it. As Jefferson (1813), himself
an inventor and America’s first Commissioner of
Patents, noted:
“He who receives an idea from me, receives in-
struction himself without lessening mine; as he
who lights his taper at mine, receives light without
darkening me.”
Just as many organizations, particularly in
today’s more intensive knowledge economy
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
recognize the need to develop innovative solu-
tions to the problems and challenges they face,
so the people working in these organizations are
also likely to recognize that need. However, on
the reasonable assumption that not everyone is
driven by that passion, yet might still be inclined
to be inventive or innovative, it is important that
organizations make it easier for individuals to
offer something new.
Getting the Cultural Climate Right
There are many influences on what might encour-
age innovators to offer ideas but conditions for
the inventor have a long history of tribulation and
skepticism, as Babbage (1852), generally attrib-
uted with the invention of the computer noted:
”Propose to any Englishman any principle or
any instrument, however admirable, and you will
observe that the whole effort of the English mind is
to find a difficulty, a defect, or an impossibility in
it. If you speak to him of a machine for peeling a
potato, he will pronounce it impossible; if you peel
a potato with it before his eyes, he will declare it
useless, because it will not slice a pineapple”
If an instigator is driven to that degree of
frustration then the organizational culture might
not be conducive to encouraging innovation and
some organisational change might be required. In
more recent times, one effect of many companies
downsizing in the 1990s to produce flatter orga-
nizations, has been to focus a lot of what could
be called company culture on the shoulders of the
reduced ranks of middle-managers, and inciden-
tally further reducing the time each has available
for managing innovation.
In times of organisational change – which
increasingly is an ongoing state and one that the
facilitation of intellectual capital seeks to intensify
– the role of this middle layer of management is
crucial. For example Kanter (1993) on organiza-
tional change believes middle managers can ‘make
or break’ change programmes. It is important,
then, to ensure the middle managers have time to
devote to encouraging and developing new ideas
or that the process is not dependent upon one over-
burdened individual. Managers somehow need to
make time to support new ideas without becoming
the gatekeeper and possibly inadvertently crush-
ing the delicate flower of invention, or frustrating
people who have good innovative ideas, perhaps
even to such an extent that they leave and join a
smarter and less rigid competitor.
What, therefore can organizations do to im-
prove the cultural climate? Ekval’s (1996) work
describes a means of measuring the creative and
innovative climate of an organization. Drawing
from this work provides some guidance on the
desirable attributes an organization should have
and would benefit from, in terms of innovation.
Ekval cites the following ten factors: challenge,
freedom, idea support, trust/openness, dynamism/
liveliness, playfulness/humour, debates, conflicts,
risk taking, and idea time. It is worthy of note that
many of these attributes are very similar to those
which are also conducive to successful collabora-
tion and knowledge transfer, such as:
Challenge
Ekval sees a “high challenge” environment as
very supportive of the high energy required to
innovate. Studies have shown (Ferguson, 1999)
that in the oil and gas industry, having a working
environment which provides a challenge is very
much a main motivator.
Freedom
Allowing a relatively high level of independence
over working methods, activities and thought pro-
cesses, was also noted as being important in moti-
vational drivers according to Ekval. He describes
the opposite to this in terms of people behaviours,
thus: “The opposite climate would include people
who are passive, rule-bound and anxious to stay
9
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
inside established boundaries.” Again, work by
Ferguson, (1999) also found that.
Idea Support
Unsurprisingly, Ekval points out that where the
organization’s climate is one in which a new idea
is more likely to be met with ‘no’ than ‘yes’, or
even ‘maybe’, innovation is poor and collabora-
tion weak. Parallels can be drawn with knowledge
transfer and collaboration environments, where
there are few or no signs of the necessary reci-
procity (Cross et al (2001)), Collison and Parcell
(2001) when instigators try to draw out feedback
or opinion about a new idea.
Trust and Openness
Many studies have shown that high trust levels
are a very important factor in sharing knowledge
and by extension that will apply to the transfer of
knowledge of a new idea. For example, in seeking
a contextual definition of trust, O’Brien (1995)
defines trust as the “anticipation of positive behav-
ior”, but points out that it is bound in with commit-
ment to the idea and loyalty to the organization.
Innovators, after all, might well ask themselves
“Why am I not developing this by myself or with
another organization?” Mykytyn (1994) provides
a list of “essential attributes” which are presumed
to produce six factors essential for successful
knowledge transfer, the most significant one be-
ing trust. Developing this further, Politis (2003)
quotes Rotter’s (1967) definition of interpersonal
trust “…as an expectancy held by an individual or
a group that the word, promise, verbal or written
statement of another individual or group can be
relied upon”. This is a more complex definition
than that given by O’Brien (1995), but perhaps
more applicable and relevant as a review team
sets out to evaluate a new idea.
10
Getting the Process Right
PSN’s management buy-out provided an op-
portunity to revise and simplify the processes
associated with gathering innovative ideas. A
pilot scheme was executed in support of the core
value on innovation, as cited earlier, to test the
methods that could be adopted to gather in and
nurture good ideas and innovation, whilst at the
same time taking away from the instigator what is
often perceived as the ‘burden’ of developing an
idea on top of the ‘day-job’. Research had shown
that in some organisations, it can be said “…and
the prize for coming up with a good idea in this
outfit is the opportunity to develop it with NO
additional resources – and still get the day-job
done!” (Thompson 2004), and this was clearly a
sizeable obstacle to innovation.
The revised process changes were tested within
the pilot scheme, which provided a number of
learning points. The basic process had a straight-
forward flow and was fundamentally sound, but
a number of issues became clear that showed a
significant prize in terms of innovative ideas was
within reach, given the right circumstances. The
right circumstances required the following four
main changes.
Firstly, the functional/discipline chiefs needed
to dedicate time to support evaluation and sub-
sequent dissemination of good ideas within their
areas of influence and authority, do so in a reason-
able timeframe, and contribute more enthusiasti-
cally to debate. In some cases they either freed
up some time, or accepted the need to empower
innovation brokers with the right attitude work-
ing on their behalf. Some organizations, such as
PSN’s previous ‘parent’ company, offer a broker
model based upon the their knowledge manage-
ment broker team structure, where working in
a broker role is seen by company personnel as
a good mid-career move, because they are in a
position to network on a grand scale (Velasquez,
G. & Odem, P. (2004).
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
Brokering supports the idea of the so-called
‘psychological contract’, for which Handy (1981)
provides a useful definition, just as valid today as
when he wrote it.
“Just as in most work situations there is a
legal contract between the organisation and the
individual which states who gives who what in
consideration for what, so there is an implied,
usually unstated psychological contract between
the individual and the organisation, be it work
organisation, social organisation or family. This
psychological contract is essentially a set of
expectations.”
In the context of the pilot and the subsequently
improved and developed innovation process, the
kind of relationship is in essence a form of this
psychological and unwritten, sometimes tacit yet
understood ‘contract’, within which the instigator
offers ideas or innovations in good faith, in the
belief these may add value to the company and in
the expectation that in due course it will bring him
some form of recognition. In return, the innovation
manager or ‘process owner’ undertakes to treat all
ideas courteously and fairly, and administer them
in an appropriate and competent manner.
Feedback indicated that instigators will judge
the strength of management commitment to inno-
vation, and in PSN’s case also commitment to the
very concept of core values, on their perception
of how well their ideas are dealt with, e.g. manag-
ing business cases for investment. A half-hearted
effort is likely to be counter productive, not only
in terms of IC.
Again there is a link between the strategic
intention and exploitation of ideas in general, and
as can be seen from a number of sources, there
has been a significant rise in the number of patent
applications over recent years. The World Intel-
lectual Property Organisation (WIPO) estimated
in February, 2008 that 156,100 patent applica-
tions were filed under the Patent Co-operation
Treaty (PCT) in 2007, the highest ever recorded,
and this does not include purely national patents.
The WIPO Director General further noted that
“Strategic use of the patent system is a busi-
ness imperative in today’s knowledge-driven
economy. The success of the PCT is largely due
to the sustained use of the system by some of the
world’s foremost innovation-based companies.”
The sale of intellectual property has become a
big international business too, and is approaching
$100bn annually.
Secondly, someone needs to ‘own’ the process
of nurturing innovation and be given sufficient
management authority within the organization
to extract response from others in support of this
core value, together with adequate resources to
maintain momentum of the process. By way of
illustration, the innovation pilot manager in ef-
fect ‘owned’ the pilot program. The manager was
allowed freedom to be proactive by moving out
of the main office into satellite offices to gather
ideas and more importantly to build up trust. On
advice from the corporate communications team,
a theme of ‘The Brain Surgery’ was developed
with desk drop leaflets and posters displayed in the
offices, augmented by local project administrators
sending e-mail reminders of these sessions [aka
‘Surgeries’] to remind local staff of dedicated
session times. (Fig. 2)
(Image courtesy of www.SXC.HU and HAAP
Media Ltd, Budapest, accessed January 2008)
In general, feedback from the satellite offices
on the concept was positive, and comments such
as those below were typical.
• “It’s good that you’ve set up shop here –
much better than just posting my idea to
someone we don’t know, or never see.”
• “I wasn’t sure who I should talk to about
this, but you’ll know who to pass it on to”
• “I don’t know if this idea I have will be of
much interest, but here’s the story…”
• “I haven’t really got the time to follow this
up by myself, but I was just thinking one
day about…”
11
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
Figure 2. PSN’s “The Brain Surgery” flyer.
There was general goodwill towards the con-
cept of gathering ideas, recognising instigators and
contributors, and developing the more promising
ideas. Over the relatively short duration of the
pilot, trust built up between personnel and the
pilot innovation manager, and there was even
time for some ideas to be developed and put into
use during the 3 month pilot.
Thirdly, innovation processes need to allow
the initial proposal to be kept low key because the
originator may have doubts about the appropriate-
ness or viability of their idea. In either case, the
subsequent discussions should remain relatively
confidential, and ideas abandoned if that is the
outcome, outwith the public eye. Instigators do not
want their unsuccessful ideas aired widely because
they may be subsequently ridiculed. That response is
also noted in Taleb’s (2007) account of the invention
of the laser. If these first tentative steps lead on to a
12
potentially worthwhile idea, the idea can be opened
up to a wider internal population. Another reason
for retaining confidentiality is that of assuring the
inventor that his idea will not be stolen.
Fourthly, the system needs to be flexible
enough to allow the instigator to stay involved or to
drop back to remaining merely informed, because
that’s important to people offering an idea in the
first place. Academic research suggests there is
almost always a strong emotional link between
the instigator and his idea. Encouraging people
to hand their idea into the foster-care of others
needs to be done with sensitivity.
The pilot also confirmed that from time to time,
an idea may also be marketable, in which case
formal business cases for exploitation would be
prepared. It may be worth noting that in today’s
knowledge intensive business environment, sell-
ing intellectual property has become a substantial
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
global business. The European Patent Office cites
Athreye and Cantwell (2005) who calculate the
value of intellectual property sales as having grown
from around 41$bn in 1995 to around 95 $bn in
2005, with the trend over the last 20 years being
very steeply upwards.
Determination of which innovation might be
worthy of development will depend upon the
decision making criteria used within the organi-
zation, and in many cases these will conform to
relatively standard business investment rules and
norms, such as cost/benefit, return on investment
and so on. However, with new ideas it is often
more difficult to make sound judgment whilst
minimizing business risk. Organizations which
regularly make good use of collaboration methods
may already be comfortable with the concept of
some form of collective decision making at least
for new ideas. In more recent times, they have
been able to draw upon the work of Surowiekcki
(2004) on the ‘wisdom of crowds’. He cites three
necessary conditions for getting that right:
• Independence: where people’s opinions
are not determined by the opinion of those
around them
• Decentralization: where people are able
to specialize and draw on local knowledge
• Aggregation: where there is some room in
the process for turning private judgments
into a collective decision.
If these are all satisfied, Surowiekcki contends,
the group judgment is likely to be accurate.
Again the matrix organization, with its tenden-
cy towards networking, is likely to develop more
ideas than the more traditional organization.
There also needs to be room in the process to
allow for what Taleb (2007) calls the ‘black swan’
event. Describing the invention of the laser as a
‘solution looking for a problem’, Taleb notes that
the inventor, Charles Townes, had merely been
trying to split light beams, and no more than that,
and indeed Townes’ colleagues teased him about
the irrelevance of his discovery! Taleb invites
the reader to consider the effects of the laser in
the world; compact disks, eyesight corrections,
microsurgery, data storage and retrieval – all
unforeseen applications of the technology.
Development of processes focussing on in-
novation is one thing, but embedding that process
within an organization is quite another. Newman
(2007) argues that one of the biggest barriers to
the organizational changes needed to improve
innovation can be described as the ‘NIH’ (not
invented here!) syndrome. Broadly his advice is
to manage the development of the process together
with those who will subsequently use it. “When
people invent their own method for implementing
new ideas, they’re more likely to make it happen!”
Newman suggests the facilitator should stop short
of providing a complete solution, and instead
provide only a partial one, so that the users need
to become involved to finish the process and more
importantly, to ‘own’ it.
The matrix structure has an advantage in that
the chiefs, who are often subject matter experts
for at least a part of their discipline or function,
are already known across the project assignments.
Similarly there is an opportunity for the intellectual
property manager, brokers and function/ discipline
chiefs to collaborate over IC.
The nature of innovation in many organisa-
tions is such that innovations are seldom purely
single discipline anyway. Typically, what might
start off with one individual seeking a solution to
a problem, can quickly develop into a wider solu-
tion. The dry dock example given earlier fits that
category. It should be remembered too that most
inventions are really incremental developments
of existing solutions.
Drawing together the multiple threads asso-
ciated with organisational culture and structure
reinforces recognition of the importance of or-
ganisational culture in a change programme, as
concluded by Demski and McCormick (2004)
when discussing oil and gas industry change
management.
13
 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
“In short, being successful in a changing culture
requires difficult, long-term effort by manage-
ment: perseverance, consistency, relentlessness,
and commitment. It must be recognised that new
initiatives reinforcing radical shifts in strategy,
deployment of new technology, or other significant
organisational changes will not succeed without
cultural change. Culture underpins everything in
the organization - from work processes to deci-
sions and behaviours. Without focused attention
on changing the underlying culture, major new
initiatives will likely be impeded and resisted,
and, as a consequence, desired results will not
be reached”
skill sets For Mangers
Whilst it is true that innovation comes from those
within organizations, any organization which
mismanages its people and processes will not
benefit significantly from the intellectual capital
held within the heads of its personnel. Good man-
agement of both people and innovation processes
is required. So what are the required skill sets
for managers charged with sustaining a strategy
supportive of innovation?
Managers have to adopt and adapt new methods
of working to nurture intellectual capital. There
will be number of areas where change is needed,
for example, some consideration needs to be given
to the reward structure for individuals or teams.
There also needs to be some form of incentive of-
fered to the project assignment team managers to
encourage their team members to feed innovation
back into the wider organization. On a large project
assignment, there might even be, for at least part of
the duration of the project a person charged with
doing that. Even running a low-key ‘league table’
might help this, as PSN found when innovation
submission figures became available for the pilot
innovation program. The two participating offices
began to compete with each other.
It’s important to ensure that the process includes
14
rewarding in a way which is appropriate, rather
than assuming that recognition must always be
monetary. Ferguson’s (1999) motivational study
indicated that financial considerations were about
fifth or sixth in the ranking of motivational driv-
ers.
Work ethics vary globally and recognition of
how different cultures view such issues is needed.
For example, experience indicates that the stronger
capitalistic culture in the USA feeds a tendency
towards instigators seeking a formalized deal
outlining the reward for the idea even before
the idea has been fully described. That seems
less prevalent in other Western cultures, and by
contrast, in Eastern cultures, frequently there is a
dominance of a team gain ethos over individual
gain, for example in the Japanese car industry,
such as the ‘quality circles’ at Toyota.
Managers may also need to manage indirect
sources of innovation, calling for a modified ap-
proach to that of internal management techniques.
For example, Rometti (2006) in IBM’s Global
COE Study on Innovation, noted from interviews
with 765 CEOs and business leaders that business
partners (36%) and customers (34%) were catching
up on the already high proportion of good ideas
generated by employees (41%). Interestingly, this
study noted that only 15% of innovative ideas
came from dedicated research and development
teams. This suggests that future trends may require
a change of emphasis from managing a formal
Research & Development department to managing
innovation from wherever it comes.
ConClusion
The organizational structure of the matrix multina-
tional organisation is clearly more beneficial than
traditional hierarchical structures when facilitating
intellectual capital. However, aspects of culture
and business environment, and how these are man-
aged within the organizational structure, remain
vital issues in the support of intellectual property
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
development. Considerations that have to be taken
into account include the management of people
and processes to improve innovation. Alignment
with the organization’s strategy is important, as
is the need to embrace new technologies as they
emerge, for they offer opportunities. The example
of PSN is indicative of some of the human factors
that are important to innovation, such as mutual
three-way trust between instigators, reviewers,
and company managers.
In the modern knowledge intensive business
environment, most organizations stand to gain a
substantial prize in terms of innovative ideas, but
these need to be coaxed out to win that prize. Part
of that coaxing is likely to include an imperative
of innovation as an ongoing activity to gain com-
petitive position, and in turn managers will need
to heed the foregoing points on organization.
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KEY TERMs
Term 1: Community of practice
Term 2: Contractors
Term 3: Disruptive events
Term 4: Downsizing
Term 5: Gatekeepers
Term 6: Intellectual capital
Term 7: Managers
Term 8: Matrix organization
Term 9: Multinational organization
Term 10: Oil and gas industry
Term 11: Organizational culture
Term 12: Organizational structure
Term 13: Strategy
Term 14: Subject matter expert
Term 15: Values
 17

Chapter 2
An Epistemology of Intellectual
Capital and its Transition
to a Practical Application
Jan Carrell
Northwestern College, Colorado Technical University, USA

ABsTRACT
Organization requirements for survival evolve reflective of the environment in which they exist. It has
been theorized the organizational tool for survival of the 21st century is intellectual capital. As with new
concepts the transition from theory to practical implementation is not without challenges. Intellectual
capital struggles with transitioning into the world of business. This chapter includes a limited study of
organizations in the Midwestern United States whose executives espouse a valuation of their organiza-
tions’ intellectual capital but have not bridged the gap from the theoretical understanding of intellectual
capital to the practical documentation of their organizational intellectual capital in practice. This find-
ing illustrates an estrangement between the academic field of theory and the practical implementation
in the organizations.

inTRoDuCTion century. This chapter queries whether intellectual

Organizations function as organic entities that
evolve and adapt in response to their internal and
external environments. Organizational responses
to their environments emerge in the course of ex-
ecutive interpretation of organizational strategic
needs. In recent decades theorists have identified
intellectual capital (IC) as an organizational asset
that enhances organizational survival in the 21st
DOI: 10.4018/978-1-60566-679-2.ch002
capital fulfils that role. A brief overview of the
evolution of organizations and human resources
establishes a framework for organizational intel-
lectual capital valuation. Two questions addressed
in this presentation are whether executives define
their intellectual capital and whether these execu-
tives value their intellectual capital as demonstrated
by their actual practice. This discussion provides
empirical data from three types of organizations
and from three levels of executives. It is this au-
thor’s position that intellectual capital alignment

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
to organizational strategic plans is a prerequisite
to efficient organizational operations. In order
to establish this alignment business executives
must be able to define their intellectual capital in
tangible terms, to select meaningful intellectual
capital, recruit this intellectual capital, and finally
to measure the added value of their intellectual
capital to organizations’ profile. The data from
this study identifies a gap between the executives’
definition of organizational intellectual capital
and the valuation executives demonstrate in their
actual practice. This breach between theorists’
prescriptions for successful organizations and
executive implementation of the recommended
tools appears to be consistent with each of the
organizations studied in this discussion.
inTEllECTuAl CAPiTAl
FounDATions
History by definition reflects past events. These
past events lay the foundation and indeed mandate
the design and structure for the organizations of the
future. From organizational history, we are able to
track patterns and forecast trends of organizational
behavior. This historical reserve communicates
tools and resources that have been successful
and also identifies those management attempts
that were not successful. The wise recognize the
value of these lessons learned and benefit from
the understanding of the classical management
theorists’ dialogue. Oliver Wendell Homes (1809-
1894) stated “When I want to understand what is
happening today, I try to decide what will happen
tomorrow; I look back; a page of history is worth
a volume of logic.”
To renew our understanding of organizational
behavior a brief overview of the evolution of
management theorists, applicable to both orga-
nizational theory and human resource utilization,
is illustrated in this section. An understanding of
why organizations think and behave as they do in
the 21st century sets the stage for an appreciation
18
of the environment intellectual capital is seeded.
Understanding where we came from enriches our
understanding of who we are and aid in predict-
ing where we are going as well as contributing
to the success of the trip (Sussland, 2001; Weick,
1999).
However, to understand organizational devel-
opment without recognizing the time and environ-
mental factors in which these changes occur is like
the description of an elephant by the blind men in
the old Indian fable (Saxe, 1816-1887). George
and Jones (2002) stated that temporal and spatial
concerns are essential features of organizational
behavior, and that it makes little sense to ignore
them, treat them implicitly, or treat them in an
inadequate manner. Weick (1999) asserts that
interest in the temporal and sequencing concerns
of organizational behavior offers the opportunity
to predict organizational needs in the 21st century.
This said, we can then first understand the milieu
that nourishes the concept of intellectual capital,
secondly assess its acceptance, and finally predict
its survival.
Organizations are metaphorically described as
living organisms existing in evolving ecosystems
(Jawahar et al., 2001; Church, 1997). It is valuable
to recognize the external environment influences
that dictate the assets and resources executives
exploit to fortify their organization’s strategic
and competitive market position (Daft, 2004).
The eras in which organizations adapt are neither
distinctive nor explicit and may in fact vary based
on the multidisciplinary interpretation. Organi-
zational history is traced thousands of years ago
when organized societies and political structures
marshaled labor and resources to achieve a com-
petitive niche in their limited geographic worlds
(Sherman, 2003). Unwritten laws and loyalty
proscribed human resource deployment with a
high degree of structure, codes, and contractual
relationships, combining elements of nomadic
tribes, military strength, Roman administration,
and Christian beliefs (Sherman, 2003). Global
trade, in the then-known world, competition for
An Epistemology of Intellectual Capital and its Transition to a Practical Application
possessions, and social stratification from the
early depictions of organizational structure circa
3500 B.C. through the 19th century define the
management behaviors during these early periods
of organizational history.
Valued organizational assets are chronicled
reflective of the era in which the organizations
exist. Organized groups 3500 years ago defined
their assets as stone, water, seeds, and domesti-
cated animals as these organized units struggled
for survival (Sherman, 2003). Organizational
behavior can be traced through the eras of Agrar-
ian societies, defined by families and clans,
which dissolved under the emergence of military
strength when assets were defined by human
resources found in the peasant infantry. Military
influence on organizational structure and design
is skillfully illustrated in Sun Tzu’s documented
hierarchical organizational strategy in The Art
of War dating back to 500 B.C. (Sun Tzu, trans
Denna, 2001). Human resources were recognized
as valuable assets for their military performance
and manual dexterity throughout the Ancient Era,
Middle Ages, Renaissance, and into the Industrial
Revolution.
Each era represented strategic organizational
positioning based on the knowledge and infor-
mation available to them at that specific time.
Information regarding navigation and commercial
exploration was shared and technology evolved
which translated into organizations’ growth op-
portunities. With this organizational development
appeared new organizational theorists whose theo-
ries became the basis for classical management
(Boylan, 2002; Wertheim, 2004; Hatch 1997).
Human resources remained a valuable orga-
nizational asset in various roles throughout these
centuries. Organization executives’ compartmen-
talized their human resources in job specializa-
tion with Adam Smith’s (1723-1790) treatment
of labor. Other early management and human
resources theorists include Babbage (1792-1871)
who taught basic principles of human resource
management and the economy of machinery. Marx
(1818-1883) introduced labor theory, and Lillian
(1878-1972) and Frank (1868-1924) Gilbreth
helped to find efficient methods for the workers
to maximize outputs. This human resource valu-
ation continued through the 1800s into the early
1900s with Frederick Taylor’s (1865-1915) time
and motion studies and scientific management
contributions (Wertheim, 2004). Taylor’s work
resulted in organizational improved work qual-
ity and quantity, lower costs, greater efficiencies,
higher output, labor-management cooperation,
alignment of tasks with goals, feedback loops and
training. Taylor, building on the theorists’ work
before him, presented systematic study of interac-
tions among job requirements, tools, methods, and
human skill, to address employee fit to jobs both
psychologically and physically. The Gilbreths,
Taylor, and other classical theorists established
a new appreciation for the relationship between
human resource assts and the organizational
performance by acceding to scientific data rather
than management prejudice, social stratification,
or egomania as demonstrated during the earlier
eras of the Middle Ages and Renaissance. This
historical movement generated a new approach of
recognizing and valuing the organizations’ human
resources through and following the Industrial
Revolution Era.
During this era Barnard (1886-1961) worked to
build an understanding between management and
the employee with his authorship of instructions to
managers in motivating employees (Schafitz and
Ott, 2005; Hatch, 1997; Boylan, 2002). Organiza-
tions prioritized growth and profits, incentivizing
maximization of labor productivity and produc-
tion. Barnard’s movement attempted to bridge
the separation between management and the line
employee, reflective of years of mechanistic,
formal autocratic rules, and social and political
partitions (Adshade, 2003, Allen, 1998).
During this classical era, organizations valued
their human resource assets for their technical
skills and compliance to the bosses’ demands
(Wertheim, 2004; Weber, 1958). Large monopo-
19
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
listic corporations, poor working conditions, and
job scarcity provided few opportunities for human
resources at this time in organizational history
(Adshade, 2003). It was during this mechanistic
organizational environment, theorists began to
visualize organizations as social systems with hu-
man relation assumptions (Breeze, 1980). Follett
(1868-1933) saw the need for formalization of
social-psychological organizational factors open-
ing lines of communication (Hatch, 1997). Mayo
(1880-1949) furthered this movement with his
Hawthorne Studies which predicted managers con-
cern for their employees would result in increased
employee satisfaction, and improved performance.
Kurt Lewin’s Principles of Topological Psychol-
ogy (1936) introduced the “person-environment fit
(P-E Fit).” Lewin wrote that the study of P-E Fit
must involve the person’s characteristics, specifi-
cally the emotions, thoughts, and values as these
characteristics affect the person’s behavior in his/
her environment. Maslow (1908-1970) provided a
template for mangers to measure employee needs
and to enable mangers to meet employee needs at
the level the employee was performing. However,
the window of time and environmental factors
again influenced organizational change and the
role of human resources.
The World Wars and Depression in the early to
mid 1900s, and their recoveries through the 1950’s,
mandated organizations’ executives refocus on
financial survival. Lean manufacturing operations
were required while employees struggled to keep
their jobs and feed their families (Adshade, 2003).
Priorities for organizational survival compro-
mised managers’ focus on workers’ satisfaction
(Wertheim, 2004). McGregor (1906-1964) pro-
posed his Theory X and Theory Y management
tools describing employees as either lazy requir-
ing coercion to work or self-motivated reflective
intrinsic desire to keep their jobs.
As the economy recovered from the recession
during the 1960s and 1970s, organizations again
reassessed the role of their human resources and
an organizational financial analysis prescribed
20
methods to determine human resources’ return
on investments (Swanson, 1998). This human
resource investment concept was the beginning
recognition that organizational book and market
value existed in employee selection and contri-
bution relevant to organizational competitive
advantage (Porter, 1980).
Pfeffer and Salancik (1978) debated allocat-
ing resources and authority to subunits that were
performing the jobs, providing an illusion of em-
ployee empowerment and recognition of employee
contribution. Executives examined organizational
structure and design with a focus on employee
moral as a factor in their motivation contributing to
their productivity (Blau, 1965). Executives began
to utilize group dynamics to encourage employee
participation in decision-making and employees
began to be considered for their interconnectiv-
ity in the organization, their knowledge beyond
their technical skills, and their corporate insight
(Wertheim, 2004; Katz and Kahn, 1966). New
strategies were sought and identified and tested.
Quick organizational remedies to the new envi-
ronmental, technological stressors and aggressive
global competition were assessed, attempted, and
for a period utilized. These tools included quality
circles, restructuring and reengineering, pay for
performance, empowerment, the Disney model,
benchmarking, MBO followed by MBWA, TQM,
ISO 9000, culture climates, downsizing and
streamlining (Collins, 2000; Boyett et al 1998;
Peters et al, 1985; Abrahamson, 1996; Naisbitt,
1982; Carsons et al, 2000; Grieves, 2000; Marash
et al., 2003; Moyer, 2004).
The labor force became increasingly mobile,
diverse, and informed. The 1970’s and 1980’s
generated various schools of thought (Daft, 2004;
Connolly, Conlon, and Deutsch, 1980). Organi-
zations of the future were described as changing
entities with an increasing professional labor
force, augmented by information flow demand-
ing recognition of knowledge management by
virtual organizations. Drucker (1974) recognized
organizational change was occurring more rapidly
An Epistemology of Intellectual Capital and its Transition to a Practical Application
than ever before, and he referred to this period as
a time of instability looking for a miracle drug.
Connolly, Conlon, and Deutsch (1980) stressed
organizational effectiveness through structure,
chains of command, and span of control. How-
ever, Peters and Waterman (1982) and Deal and
Kennedy (1982) argued the importance of an
organizational culture that emphasized stressing
employee satisfaction to reduce turnover and
enhance productivity. Roy (2001) described this
array of management activities as each dominant
giving way to the next as organizations searched
for the secret for survival.
The Information Age emerges (Naisbitt,
1982). Preparation for survival in the 21st century
mandated sustained organizational sensitivity to
the demand, both externally and internally, for
information. Technology sophistication continued
to accelerate, immediate information was avail-
able and demanded, and aggressive competitive
intelligence was sought as the skirmish for mar-
ket share was the norm (Naisbitt, 1982; Prusak
et al., 2003). Organizations were characterized
as adaptive, complex systems. Organization ex-
ecutives emphasized fit: matching processes and
performance with the individuality of their human
resources (Wertheim, 2004).
The pace of change accelerated, continuing
the aggressive expansion into the global arena.
Competitive global positioning and niche markets
sought multinational networks (Ulrich and Lake,
2001; Norton, 1998). Customer idiosyncratic de-
mands and portable market strategies redefined
organizational thinking and their perspective of
valued assets. Organizations recognize employ-
ees as a critical link necessary for sustainable
competitive positioning, however, the transition
continued with employees still as a means to an
end, an after-thought (Ulrich and Lake, 1991).
Human resources were still considered a cost
even though recognition of their tangible contri-
bution to organizational performance was more
widely recognized (Swanson, 1998; Daft, 2004).).
Employee valued contributions were shifting
from a skills and core competencies orientation
to employee knowledge, interconnectivity, and
corporate awareness. Swanson (1998) stated
that executives who developed employees intel-
lectually experienced improved returns on their
investment (ROI).
Stewart (1997) projected that at the turn of
the 21st century, 59% of the workforce would be
working chiefly with information as compared to
17% in 1900. Chase (1997) identified knowledge
management as one of the driving forces of or-
ganizational change and wealth, and a key factor
in securing organizational survival in the future.
Kennedy (1998) recognized the 1990’s organi-
zational climate as information-and-knowledge
intensive, citing a study of 2,959 U.S. corporations,
of which 90.6% were information-intensive. These
knowledge management processes were translated
into corporate knowledge and corporate assets
(Kennedy, 1998; Sveiby 1998). Stewart (1997)
referred to this corporate knowledge as intellec-
tual capital leveraged to produce a higher-valued
corporate asset. Bontis (2001) states management
of intellectual capital influenced every aspect of
business.
Ulrich and Lake (2001) wrote that organiza-
tions preparing for the 21st century would have
to focus on competitive positioning, with a new
understanding of what their human resources
were and how these human resources fit within
the constraints of the organization’s strategic
plan. “Building better products or services, pric-
ing goods and services lower than competition,
or transitioning technological innovation into
research and manufacturing operations must today
be supplemented by organizational capability”
(Ulrich and Lake, 2001, p 77). Wiseman (2001)
claimed that the management of human assets at all
levels within the organization would determine an
organizations’ sustainable competitive advantage.
Managing these human assets would be especially
important in this knowledge-intensive environ-
ment (Overholt et al, 2000). Employees transi-
tioned to thinking independently, aligned with the
21
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
organization’s mission, vision, and values (Daft,
2004). Ulrich (1997) discussed about the business
environment as a boundary-less, learning entity.
Nadler, Gerstein, and Shaw (1992) described the
evolving features of 21st century organizations as
autonomous work teams, high performance work-
systems, networks, and virtual offices.
Sveiby (1998) stated traditional accounting
tools were quickly losing their relevance in a
business world where most of the valuable as-
sets were intangible and centered on knowledge,
entrepreneurship, and information. Dzinkowski
(1999) recognized that corporate financial in-
dicators were more than the revenue flows and
tangible assets of the traditional accounting proce-
dures. The advent of the 21st century environment
required new accounting methods to measure
new management concept of valuing the human
resources, specifically their intellectual capital that
surfaced over the past decade under the umbrella
of knowledge and corporate awareness. For hu-
man resources to support the business strategy,
human resource management must be recognized
as a fundamental part of the business planning
process (Senge, 1999). At no time in the evolution
of organizations and the role of human resources
has the need or demand for employee knowledge,
interconnectivity, or corporate awareness been
more critical than in the virtual environment of
the 21st century. An organizations’ dependence
on and need for employees’ intellectual capital
is phrased as the organizations’ new resource in
the virtual environment (Ulrich, 1997; Guthrie,
2001; Bhatt, 2001; Johanson et al, 2000; Guthrie
et al, 2001; Edvinsson et al, 1997; Roos et al,
1998; Kraatz, 1998; Klaila and Hall, 2000; An-
driessen, 2001).
The business environments of the 21st cen-
tury are experiencing leaderless, boundary-less,
virtual organizations (Alonzo, 1999; Chang et
al; 2001; Ulrich, 1997; Cant, 2004; Hock, 2000).
Virtual teams lead the way to success, working
in virtual offices, augmented by the information
technology prevalent in this century (Nelson et
22
al, 2005; Chang et al, 2001; Alonso, 1999; Boyes
et al, 2003; Guthrie, 2000, Chase, 1997; Ulrich,
1997; Werther, 1999). “Virtual teamwork is a
holistic approach integrating three key perfor-
mance drivers: people, process, and technology”
(Chase, 1997, pp 84). These requirements in this
era establish the foundation for the individual’s
intellectual capital.
inTEllECTuAl CAPiTAl:
WHY ToDAY
intangible Assets Era
As the 1990’s ended, the business environment be-
came one of virtual offices using complex networks
and sophisticated technology for communication
and aggregating data. The desirable employees for
this millennium were knowledge-workers who
knew and understood the organizational strategy
and were able to aggregate information, synthesize
and analyze data, make decisions instantaneously,
and implement them independently (Chiavenato,
2001; Daft, 2004; Guthrie, Petty, and Ulf 2001).
In the virtual corporate environment employee
judgment has to be trusted and depended on to
be representative of the organization without the
luxury of drawing consensus, accessing team
input, and without supervision and mentoring
of a manager down the hall or two floors above
(Smallwood, 2004). This environment mandates
that organizations optimize their employee corpo-
rate awareness, knowledge, and interconnectivity:
their intellectual capital.
Employee skills and core competencies are
expected to be present while it is the employee’s
intangible asset of intellectual capital that must be
sought (Ulrich, 1997; Roos et al., 1998; Guthrie,
2001). Organizations need to look at their human
resources and identify the intellectual capital nec-
essary to provide sustainable momentum for the
organization’s competitive advantage (Edivsson
et al., 1997; Roos et al., 1998).
An Epistemology of Intellectual Capital and its Transition to a Practical Application
Intellectual capital is viewed as a facilitator of
information, manager of knowledge, producer of
technology, source of organization intra-structure,
and basis of entrepreneurial creativity. It is in the
external and internal organizational environment
of this century that the demand for information
and technology sophistication exists and it is
the organizations’ intellectual capital which
orchestrates the utilization of the organizations
capabilities.
The theoretical allocation of value to organi-
zational intellectual capital elevates the intellec-
tual capital asset to a level of executive scrutiny
and legitimacy as both executives and theorists
struggle with determining whether IC is a concept
or a reality (Guthrie, 2001). Recognition of the
need and importance of the organization’s intel-
lectual capital has theoretically been established
in organizational financial success and competi-
tive positioning (Guthrie, Petty, and Ulf, 2001).
The next level of development of the intellectual
capital concept is for organizational executives
to define, measure, and reward their intellectual
capital (Guthrie, Petty, and Ulf, 2001). Davenport
et al. (2003) predict intellectual capital to be the
new wealth of organizations. Smallwood (2004)
states intellectual capital enhances investors’
confidence for future earnings. However, for
intellectual capital to live up to the new wealth
predictions executives must first recognize a
benefit in and then secondly identify methods for
identifying, measuring, managing, and rewarding
their organization’s intellectual capital.
Executives have struggled with identifying,
and then measuring and accounting for their in-
tellectual capital. Fiscal responsibility demands
that organizations optimize their finite time and
resources and report on the return on the organiza-
tions’ investments. If executives are going to invest
their limited resources in their IC they must be
able to identify and measure their IC, and report
organizational benefits from these investments
(Cohen et al., 1999). Organizational executives
must be able to define their intellectual capital,
and measure the ROI to determine whether, in fact,
allocating their limited resources to IC is adding
corporate value (Cohen et al., 1999).
introduction of intangibles
There is evidence that traditional financial mea-
sures are losing confidence in the marketplace. For
instance, an Ernst and Young study (Davenport,
1997) shows that investors see traditional financial
measures as a lagging indicator of organizational
financial success. This same study demonstrated
that intangible resources, not products, consti-
tute the organization’s competitive advantage
(Davenport, 1997). It was during the 1980s that
intangible assets were introduced as significant
contributors to organizational value and were
referred to as the organizations’ “hidden assets”
(Edvinsson et al., 1997).
Executives have historically struggled with
the measurement of non-financial variables (Low,
2000). In order for executives to account for their
hidden assets, organizations have to identify,
define, and measure these assets. Sveiby (1989)
conversely recommended the Intangible Asset
Monitor which created an intellectual capital
management tool for measuring total employee
competences including their intellectual capital.
During the 1990’s, Edvinsson’s Skandia Navigator
provided an accounting tool to measure intangible,
hidden assets. The indicators of the Navigator
tracked the common financial trends as well as the
companies’ intangible assets such as information
technology literacy. Kaplan and Norton (1992)
initiated a Balanced Scorecard model which of-
fered a framework for creating value from both
tangible and intangible assets. This tool used a
set of cause and effect relationships to determine
output measures and performance drivers
Dzinkowski (1999) has noted that with the
introduction of Adam Smith’s principles on eco-
nomics in 1776, accounting models listed only an
organization’s tangible assets, ignoring the hid-
den value or intangible assets of an organization
23
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
which includes the current and potential value of
the organization referred to as the market value.
As the Information Age gathers momentum, the
difference between an organization’s book value
and market value widens (Guthrie, 2001). This
difference between the organization’s book value
or net assets and the organization’s market value
is referred to as the organization’s intangible as-
sets or “hidden value.” The table in exhibit 1-1,
pp 11, demonstrates this calculation. Illustrated
in exhibit 1-1, General Electric’s market value
in 1998 was estimated at $169 billion. Although
their net assets were only $31 billion, the actual
cost to replace these assets in the1998 market was
$77 billion. Therefore, the difference between
General Electric’s market value ($169 billion)
and its replacement value ($77 billion) is referred
to as General Electric’s “hidden value.” It is this
value that Roos et al. (1998) call General Electric’s
intangible assets, and it is this “hidden value”, or
intangible asset, that gives organizations a com-
petitive advantage in the global markets
Admittedly, intangibles are difficult to capture
quantitatively or assign a value. Assigning a nu-
merical value to the intangibles of an organization
is similar to assigning a value to the synergy of an
organization. While conceptually a “hidden value”
exists, corporate executives continue to struggle
with assigning a tangible value to their organiza-
tion’s intangible elements that create this hidden
value (Kennedy, 1998). Sveiby (1998) states there
are three reasons for this difficulty in assigning
a value to the hidden costs of the organization:
1) assignment of a value seems pointless; 2) fear
of exposure; and 3) no tested model exists. The
determination of corporate value is traditionally
based on generally accepted accounting practices
(GAAP). GAAP recognizes corporate value as
the business’ strategic portfolio and refers to it
as its book value:
Book Value = Monetary Capital + Physical Capital
(Joia, 2000)
24
However, these standards ignore or struggle
with the line item of their intangible assets
(Barsky and Marchant, 2000; Roslender and
Fincham, 2001; Johanson, 1999; Lusch et al,
1994; Flemming, 2002; Foster et al, 1997).
Roos et al. (1998) define an organization’s total
value as consisting of its financial value and
its intellectual capital: TV= FV + IC. (Roos et
al., 1998). Stewart (1997) states that “the hard
assets of a knowledge company contribute far
less to the value of its product (or service) than
the intangible assets--- the talents of its people,
the efficacy of its management systems, and the
character of its relationships to its customers---
that together are its intellectual capital” (pp 57).
Stewart goes on to say that intellectual capital
is not the physical capital of the organization
but rather the knowledge, capabilities, ideas,
relationships, and talents of the employees.
This employee owned capacity of an organi-
zation creates, produces and defines all other
organizational assets. Executives may be able
to recite payroll costs but are not able to quote
the replacement costs of their intellectual capi-
tal, or whether these assets are appreciating or
depreciating (Stewart, 1997).
The growth of organizational networks
through mergers and acquisitions, however, based
on organizational market values emphasizes
organizations’ intangible asset value. Market to
book value in the 1970’s was equal 1:1, in the
mid-90’s it had increased to 3:1, and by 2000 the
relationship is more than 6:1, demonstrating an
increasing emphasis on the organization’s hidden
value or intangible assets (Edvinsson, 2000). In
the 1920’s and 1930’s, U.S. investments were
70% in tangible goods and 30% in intangible
goods. Today, the investments have reversed
where 70% is spent on intangibles (Edvinsson,
2000). This reversal in the trend of investments
is illustrated in Kaplan and Norton’s chart below
as organizational value is increasingly found
in their intangible assets. In 1982, intangibles
represented 38% of organizational assets. In
An Epistemology of Intellectual Capital and its Transition to a Practical Application
2002, intangibles represent an estimated 85%
of a company’s value.
The growing recognition of the difference
between market value and book value led theo-
rists to fill this difference by attempting to define
these intangible assets. While theorists’ definition
of intangible assets varies, arguably the factor
that influences all organizational assets remains
the intangible organizational asset of intellectual
capital (Stewart, 1997; Joia, 2000).
Barriers to Acceptance of
intellectual Capital
Organizational performance can be directly related
to utilization of human resources (Emde, 1998).
Whereas the employees’ technical skills are re-
quired to do a job, the effectiveness and quality
of the job are specific to the employees’ intrinsic
factors, that is, the employees’ intellectual capital
(Emde, 1998). It is this IC that encompasses the
employees’ knowledge, connectivity, and expe-
riences and is articulated in employee behavior.
It is this behavior that directly influences the
organizations’ performance and survival (Steyn,
2003). Ulrich (1998) states intellectual capital
is the organizations’ only appreciating asset the
more it is utilized.
Dzinkowski(1999) states that the business
society has entered a new era where the wealth of
nations is dependent on the organizations’ intel-
lectual capital. Accordingly, the best formula for
understanding intellectual capital value is deter-
mined by the difference between the market value
and the book value (Dzinkowski, 2000). Thus,
Market Value = Book Value + Intellectual Capital
(Joia, 2000)
The value of IC is like having a company sud-
denly struck by a knowledge blight that erases
all of corporate knowledge from a storage media
including the employees’ minds. The difference
between the market value of the company before
and after the blight struck is the value of the
company’s intellectual value (Tebbutt, 2004).
Tebbutt (2004) states intellectual capital repre-
sents 78% of the Fortune 500 companies’ value.
According to Dzinkowski (1999) the intellectual
capital value can equal 75% of the corporation’s
value. However, organizations still struggle with
defining their intellectual capital using the GAAP.
Measuring, managing, and assigning value to
this asset is problematic because of its intangible
characteristics (Roberts, 2001; Roos et al., 1998;
Mouritsen, 2001). When intellectual capital is not
defined, it cannot be measured, and when it is not
measured, it cannot be managed (Heffes, 2001).
Further, an organization cannot optimize what it
does not define, measure, or manage.
Lev says that one of the reasons IC assets are
not measured or managed is because these assets
are not publicly traded, sold, or banked (Lev, 2004;
Cohen 1999). Secondly, organizations cannot own,
shelf, or inventory these assets, and, further, these IC
assets travel with the mobile employee. Therefore,
it is riskier to depend on or account for these IC as-
sets as a value to the organization’s book or market
value (Bernhut, 2001; Sullivan, 1999). However, it
is the measurement and management of the organi-
zations’ intellectual capital that assigns a value to
the intellectual capital by the organization (Steyn,
2003; Furlong, 2001). Executives focus on those
organizational factors that will generate profit and
strengthen strategic positions in the market. These
factors are assessed, monitored, and controlled. The
dilemma with intellectual capital is that executives
struggle with defining it, assessing it, monitoring
it and controlling it.
Further, Steyn (2003) regards intellectual
capital as an employee-owned asset rather than an
organization-owned asset. Germeraad and Mor-
rison (1998) illustrated how organizations could
work with employees to capture these assets and
increase their organization’s market value with
their IC. They recommend methods by which
organizations could optimize their hidden, intan-
gible assets: identify the IC asset, screen IC for
25
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
added value to the organization, operationalize IC
to meet organization needs, protect and develop
valuable organization IC, and divest IC that has
lost its value to the organization.
Roberts (1999) cites three benefits or incen-
tives for organizations to recognize their intel-
lectual capital: 1) intellectual capital can improve
benchmarking in corporate quality management,
changing the Plan-Do-Act-Check cycle to
Codify-Map-Select-Build-Deploy-Protect cycle
of intellectual capital; 2) intellectual capital can
be used as a looking glass and as a motivator for
the company; 3) intellectual capital can provide
external legitimization. Organizations that do
develop IC measurement and management can
align employees with organizational strategy and
anticipate positive financial outcomes (Bukowitz
et al., 1997). The management and measurement
of organizational IC could assist executives in
joining the organizations’ strategy and vision with
the individual employee activities, identifying
trends, and establishing operative goals on which
to act (Bukowitz et al., 1997).
Germeraad et al., (1998) state that the active
measurement and management of the organiza-
tion’s intellectual capital has increased organiza-
tional opportunities for organizational growth and
reduced operating costs. A contributing factor to
the lack of systematic tallying of these assets is in
part due to the information overload that is also a
characteristic of this century. A study of top execu-
tives in U.S. Fortune 500 firms demonstrated that
while these executives acknowledged the impor-
tance of intangible assets, they also acknowledged
that drawbacks exist. Such assets are typically not
measured, or, when they are measured they may
not be used (Stivers et al., 1998). The question
remains as to whether definition and valuation of
IC has moved beyond the theorists’ research to the
executives’ actualization in the corporate world.
Thus, if it is good management to identify,
access, and either optimize or divest their intel-
lectual capital as the strategy of the organization
dictates, executives then must find a way to iden-
26
tify, define, measure, and ultimately manage their
I.C. Skyrme (2004) says that what gets measured
gets managed. Skyme elaborates by saying that
through the management of IC, organizations
determine where their strengths are for sustainable
performance and enhancement of their stakeholder
value (Skyrme, 2004). “Without tools to capture
and measure intellectual capital, many firms
wind up mismanaging their intellectual assets
or worse destroying knowledge value—simply
because mangers misunderstand the nature of
the IC resources” (Barsky and Marchant, 2000).
Clearly one can not manage what one is not able
to define or measure. Therein lays the barrier for
the future success of intellectual capital as a tool
for organizational success.
intellectual Capital made
operational and Valued
Theorists state that intellectual capital impacts
organization viability through its influence of
organizational stakeholder relationships (O’Reilly,
Chatman, & Caldwell, 1991). Further, these
stakeholder relationships theoretically influence
the organization’s productivity, market share,
competitive position, and regulatory compliance
(Guthrie, 2001; O’Reilly, Chatman, & Caldwell,
1991). IC, therefore, has a potentially powerful
effect on organizational performance and may
arguably be the greatest and most critical invest-
ment corporations make (Johanson et al., 2000).
However, while organizational executives may
cognitively recognize the theoretical posture of
IC added value, these executives must be able to
purposely define and measure improved organi-
zational performance as an express result of the
investment of time and money in their intellectual
capital assets.
Intellectual capital by itself is worthless,
however, unless it is understood in context of the
organization’s strategy (Joia, 2000). Intellectual
capital asset valuation requires an asset audit to
determine its fit and value to the organization
An Epistemology of Intellectual Capital and its Transition to a Practical Application
(Joia, 2000; Kaplan and Norton, 2004; Snow,
1998; Bhatt, 2001). All IC assets are not created
equal. As with Mouritsen’s tree metaphor, some
assets require nurturing and investment while
other IC assets require divestiture (Klaila and
Hall, 2000).
IC assets have a shelf life, and the benefit of
maximizing the IC investment must be balanced
with the cost of the time and money of this invest-
ment. Investments are made for future, long-term
benefits, and the IC future value is difficult to
predict (Pearl, 2001; Sullivan, 1999). For ex-
ample, if the IC asset will enhance organizational
survival, the manager must measure the value
of this knowledge, connectivity, and corporate
awareness against the cost of investing in this
asset, or whether the time and money would be
better used elsewhere in the organization. It is this
executive decision regarding the valuation of the
organization’s IC assets that is demonstrated in
the executives’ definition of their IC assets, their
IC practice, and allocation of organizations’ finite
resources to their IC.
The dynamic and uncompromising demands
of the business environment play a role in de-
termining organizational asset valuation by ex-
ecutives (Guthrie, 2001). These environmental
considerations are a determination in the costs of
IC asset investment. The enhancement or lack of
enhancement of this IC asset may have subtle, or
not so subtle, ramifications for other elements of
the organization (Guthrie, 2001; Sveiby, 2001).
According to Lev (2004), when one examines
executives’ practice of acknowledging their
intellectual capital assets the executives’ activi-
ties are unclear. The Federal Reserve economist
Leonard Nakamura states companies indirectly
spend trillions of dollars annually on enhancing
their IC (Lev, 2004). These types of investments
are traditionally not itemized publicly or system-
atically and therefore not easily accounted for or
documented (Lev, 2004).
However, considering the characteristics
of the 21st century environment and workforce
discussed earlier, it may do executives well to
remember the fluid, mobile nature of these as-
sets. These assets are only as secure as the level
of their employee satisfaction and commitment
to the organization.
The Gap Between Theory
and Practice
Little doubt exists that the world in which orga-
nizations conduct business has radically changed
from those of earlier eras and that change is not
only the norm but continuing at a pace that ex-
ceeds any time heretofore. Buzzwords, theories,
and management models fade in and out of style
in the world of business. Executives talk about
paradigm shifts, and wait for the big one. The life
cycles of these theoretical concepts are dictated
by the complexity and ambiguous organizational
implementation of these concepts. Daft refers to
the disconnect between the theorists and execu-
tives’ implementation as the great divide (Daft,
2001). It is perhaps through the study of the evolu-
tion of organizational change and the role of the
human resources that we can begin to understand
the gap between the theoretical recommendations
and the organizational implementation of these
recommendations. Perhaps then valuation of the
IC asset can be facilitated in the organizations and
the potential for its survival measured.
Hatch (1997) states in studying and under-
standing the evolution of organizational behavior
consideration must be given to the application of
the theoretical organizational concepts introduced.
Moreover, the reasons for this separation include
the fact that research methods sophistication
has made practical implementation less useful.
Additionally, communication between the two
groups occurs infrequently, peer-reviewed pa-
pers are disseminated within a small incestuous,
closed loop, executives do not traditionally turn
to academicians for solutions to operation prob-
27
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
lems or management strategies, and researchers
likewise do not turn to practitioners for inspira-
tion in research questions or for insight in their
interpretation.
Mintzberg (1998) believes there has to be a
coming together of the academia and business
worlds. That is to say, what is theorized and taught
in academia should be implemented in corpora-
tions. While executives and theorists share many
ideas and concepts, such as missions, visions, and
value statements, fundamental differences exist.
Executives deal with markets, multiple stake-
holders, and operational issues focused on the
bottom line and organizational survival. Scholars
profess theories, lecture from scholarly material,
and coordinate academic curricula. Organiza-
tions, conversely, exist in a world of aggressive
competition, swift market changes and economic
fluctuations, with dramatic, and sometimes fatal,
results of executive decisions. Academia exists in
a bureaucratic, fairly static, tradition of instruction,
knowledge creation, and theory exploration.
Bridging this great divide will not be easy. In
1996, more than 1,700 books were published on
business methods. Corporations, moreover, spent
$60 billion in management training as well as
spending $43 billion on management consultants
(Pfeffer et al., 1999). However, theorists and
academicians have frames of reference that differ
from executives when dealing with IC valuation.
The methods for obtaining and the purposes
for using information are dissimilar. Worse, the
work of the theorists and executives is radically
estranged. Their social systems and operative
processes are structured and designed differently,
and the time frames in which they conduct their
business are disparate (Daft, 2001). Theorists
think and develop concepts in an environment
different from that of the executives and manag-
ers. Daft (2001) notes that mangers feel like they
are flying the airplane while they are building it
without the luxury of studying the implications
prior to initiating the task. Stewart (1997) states
executives must be able to measure year-to-
28
year performance, or in today’s pace business
progress is more frequently measured quarter to
quarter, which allows for company to company
comparisons. Executive ramifications to negative
operational results impact stakeholders, stock-
holders, and ultimately their own jobs all within
a very brief window of time. Theorists are able
to design, rethink, and restructure theories prior
to launching these theories into an environment
of realistic application. Theories by definition are
to be tested and validated frequently in simulated
laboratory environments. As this demonstrates the
creators and users of theories belong to separate
communities with very different value systems
and ideologies.
However to bridge the gap between theorists
and executives several criteria must be met.
Specific to the application of the IC concept to
the field of management, IC must be defined in
terms meaningful to the executives and must be
practically measurable in terms of ROI and con-
tributions to the organizations bottom line. The
following parameters may be considered. First, the
definitions must be in organizational, operational
terms. Second, the success of the IC concept must
be realized by the attainment of tangible organiza-
tional performance measures. While recognition
of the presence on the organizational intangible
assets exists, and the importance of IC may be
obvious, questions remain as to the measurement
and documentation of IC in the corporate world
(Steyn, 2003).
Steyn (2004) states that successful 21st century
organizations in the will be knowledge-creating
organizations that develop, produce, disseminate,
and embody new knowledge. He further notes
that “IC has become one of the prime sources for
knowledge-based and knowledge-enabled orga-
nizations” (Steyn, 2004, pp2). Marr et al., (2004)
argue that it is now time for theorists as well as
practitioners to move together to the next level of
activating intellectual capital. This level includes
methodologies, valuations and justifications for
organizational implementation. IC may be the
An Epistemology of Intellectual Capital and its Transition to a Practical Application
bridge that connects the theorists, academicians,
and the executives.
Indeed, while IC is a theoretical concept, it
remains widely unaccounted for in the financial
and human resource documents of the business
world leaving a gap between what is logical in
theory but absent in practice (Roos et al., 1998).
Cahill and Meyers (2000) note that the practical
applications of intellectual capital accounting
remain separated from explanatory theory. Execu-
tives consistently state that their employees are
their most valuable asset, however accounting for
this asset, hiring, promoting, or documenting their
value in policies and organizational statements, or
financially planning for the intellectual capital of
their employees remains unseen (Roslender et al.,
2001). Again, the maxim “what gets measured,
gets managed” resurfaces. The theoretical defini-
tion and modeling of intellectual capital remains
distinct from the realistic business application
(Roslender et al., 2001).
The evolution of organizations has demon-
strated the progression of valued resources. The
ancient clans valued water, seed, and stone for
survival. These valued resources were replaced
many times as organizations evolved through eras
arriving at the industrial era when machines and
factories were considered valued resources. Now
as we have entered the 21st century we again look
at resources that will enhance our chances for sur-
vival. This study is presented to illustrate whether
Intellectual Capital is that resource. The difficulty
is to determine whether IC has evolved from a
theoretical construct to organizational implemen-
tation as a resource and further whether it is in
reality identified as an organizational asset. This
study queries whether organization executives in
the 21st century define their IC, value their IC in
their documentation and financial allocation, and
actually implement IC in their practice of hiring,
promoting, and award systems.
inTEllECTuAl CAPiTAl sTuDY
The intellectual capital theory states a link exists
between investing in human resources and mea-
surable improvements in the organization’s bot-
tom line. Stakeholder relationships, internal and
external, benefit from well-tended IC and a posi-
tive correlation can be found between improved
productivity and organizational financial success
and IC satisfaction (Whitehead, 1998). The focus
on intellectual capital demonstrates the shift to a
knowledge economy, information management,
and the employment of people for their creativity,
connectivity, and knowledge (Mouritsen, 2002;
Senge, 1999). This change constitutes a paradigm
shift in organizational thinking with regard to
the utilization and valuation of their IC assets as
reflected in the evolution of organizations from
earlier eras to the present time.
The 21st century’s critical organizational
need is to sustain a viable business within the
constraints and demands of an information,
knowledge management, and technology age. The
dynamic environment of the 21st century presents
shrinking product life cycles, stringent, competi-
tive markets, nanosecond information demands,
and continuous change. Executives must define
the corporate capabilities based on their finite
resources today as critically as any time in their
history (Germeraad, 1999). In an attempt to meet
these challenges, theorists and executives are look-
ing at the new management model of intellectual
capital for the answer (Guthrie, 2001; Germeraad,
1999; Johanson, 1999; Roberts, 1999; Cohen and
Backer, 1999; Petty and Guthrie, 2000; Chong et
al, 2000).
The definition of intellectual capital is a moving
target. For the purpose of this study intellectual
capital is defined as a critical human resource
depicting the organization’s knowledge, con-
nectivity, and corporate awareness (Mouritsen,
2002; Johanson et al., 2000; Klaila and Hall,
2000; Andriessen, 2001; Guthrie, 2000; Edvinsson
and Malone, 1997; Roos et al., 1998). Cohen and
29
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
Backer (1999) have termed intellectual capital
the “hottest commodity” in business, and have
claimed that it is seen as an organization’s ultimate
asset and the measure of the organizations’ real
worth. An organization’s IC gathers, disseminates,
and converts corporate knowledge into budgets,
strategic plans, and presentations and solutions
(Cohen and Backer, 1999).
The intent of this study is twofold. First, this
study evaluated whether executives in selected
Midwestern organizations espouse a valuation
of their intellectual capital. Secondly, this study
assesses whether these executives actualize this
valuation in their organizational practices. This
study is conducted on a limited basis in the Mid-
west to determine the practical intellectual capital
implementation in the heartland.
Participant selection
The types of organizations selected represented
academia, manufacturing, and service industries
located in Northwest Iowa. Three members of
each organization were selected to provide dif-
ferent perspectives within the organization as
reflected by position or role of the interviewee. In
each organization Chief Executives (CEO), Chief
Financial Officers (CFO), and Human Resource
Mangers (HR) were interviewed.
The selected organizations’ scope of services
ranged from local and national markets to inter-
national markets. The organizations’ financial
continuum varied from a few million dollars to just
under 1 billion dollars. The organizations’ products
and services were both tangible and intangible in
both competitive and niche markets. A noteworthy
factor in the interviews is the impact of the profit
and not-for-profit status of the organizations on
their value of their intellectual capital.
Methodology
The technique used to obtain this research data is an
“individual in-depth interview.” These interviews
30
were conducted face to face with the organizational
representatives. This interview method provided
each respondent the opportunity to explore the
intent of the question, and the interviewer to probe
the responses. A relaxed setting facilitated rapport
with the respondents and ensured uninterrupted
interview time. The time for these interviews
ranged from one to three hours.
The interview format was both 1) non-directive
and 2) semi-structured. The non-directive inter-
view style allowed the respondent maximum
freedom to respond within the boundaries of the
question. The semi-structured format required
the respondent to focus on the question asked to
assure continuity in the questions asked.
This interview technique is appropriate for
this study because it provides an opportunity for
respondent to query the definition, and provide
individual application in their area of expertise.
This style of survey is correct for respondents 1) in
management and 2) surveys requesting responses
to “thought” queries. This rationale is supported
by Kerlinger (1986) who stated with appropriate
scheduling, an interview can obtain the required
information, allowing for flexibility, and probing
essential to the individual situations. This inter-
view data provides an answer to the question: do
organizations value their intellectual capital.
survey Tool
The question types were open-ended to allow
for facts and attitudes to be presented without
“group-think” or organizational biases to interfere
with the respondents reply. The questions were
structured to be “suggestion neutral.” The order
of the questions was mixed to allow for responses
that were not “sequence of thought” responses.
The question tool was consistently followed to
minimize interpretation variability. The milieu
for the interview was prepared with introduc-
tions, and a review of the intent and purpose of
the interview. The intended use of the data was
described for each respondent.
An Epistemology of Intellectual Capital and its Transition to a Practical Application
The question tool was professionally format-
ted. Initial questions were simple and direct,
establishing a rapport with the respondent. The
questions included conceptual queries to individu-
alize responses and obtain responses that identified
respondents’ personal ideas and reflected their
current position. Questions were also included
that demanded existing practice clarification that
pre-empted “social responses.” The tool moved
forward becoming focused on the intellectual
capital questions. Questions became very specific
as to the organizations’ practice in valuing their
intellectual capital.
Specific documents obtained during the in-
terview include job descriptions, performance
appraisals, and mission, vision, and value state-
ments. Other data collected through the interviews
included budget figures, turnover rates, scope of
business including products and services as well
as market information. Questions are grouped by
question types to establish the respondents’ defini-
tion and valuation of IC. Research Question #1
queries whether executives define their intellectual
capital as identified by responses to questions 5,
6, and 11, the concept and definition questions.
Research Question #2 asks if executives value
their IC as determined by the responses to ques-
tions 1-4, 7-10, and question 12. These questions
are the practice, document, and finance questions.
The questions were then grouped:
conceptual questions (c): 5, 11
practice questions (p): 4, 7, 9, and 10
document questions (d): 1, 2, and 3
financial questions (f): 8, 12
IC definition: 6
industry and Question Type Findings
The findings for industry and question type syn-
thesize the data by industry and question type.
The data is blended to state industry behavior
reflective of their IC valuation as exhibited in
these selected organizations. These findings
are discussed following the established format:
conceptual responses, practice responses, docu-
ment findings, financial findings, and definition
statements.
The cumulative responses of the executives
of the service industry reflect greater conceptual
valuation of their IC. Questions 5c and 11c speak to
the executives’vision of their perfect employee and
secondly, how their organization promotes IC for
future organizational success. This organizational
behavior suggests the service industry executives
place greater emphasis on their employees’ IC and
the role of IC by their organizations’ leadership.
However, the service executives were also weak-
est in their description and expansion of how they
achieved this, indicating the role of IC in promo-
tions was more theoretical than practiced.
Academia scored second in their espoused
expectations of their employees while manufac-
turing expressed greater utilization of their IC in
their promotions. However, the overall response
of academia reflects greater conceptual valuation
of their IC, both in expectations and in their pro-
motions, than the manufacturing industries. Both
academia and manufacturing practice IC valuation
to a greater degree than the service industries.
These executive responses are reflective of
their industry cultures. The service industry dem-
onstrates a mindset of meeting customer needs
and wants versus the manufacturing focus on high
technology and repetitive manual labor, or the
academic focus on student learning and research.
These various perspectives explain their variant
espoused expectations and utilization of their IC.
Based on the overall low scores, it is interpreted
that formal integration of IC into the concept of
recognizing and promoting their employees re-
mains low in all industry sectors interviewed. The
low scores in the areas of practice, and remains
even lower scores in financial allocation of funds
to support their IC, strengthen this conclusion. The
focus of the organizations interviewed continues to
practice in an environment that does not articulate
a definitive IC valuation.
The practice questions discuss salaries, hir-
31
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
Figure 1. Responses by industry averages, graphed by question type
ing practices, and growing their IC. Academia
executives verbalize greater demonstration of
IC value in practice than do the executives in
manufacturing and service industries. Academia
executives’ scores range from 4.75 for question
4p to a score of 1.25 for question 10p. In ques-
tion 9p, which asks the value of IC in their hir-
ing practices, academia rated the lowest score in
industry comparisons, scoring 1.75. The service
executives rated the highest in their hiring practice
value of IC at just over a 2.0. The academicians’
response to question 4p, which questions salary
compensation, was significantly higher at 4.75
than either service or manufacturing. Academia
CEOs and CFOs stated salaries were commen-
surate with corporate awareness and knowledge.
The academia HR executives were only slightly
lower than the CEOs and CFOs, but four out of
the five CFO executives were optimistic in their
salary recognition based on other comparable
jobs. The academia executives consistently felt
32
that the salaries in their organizations were bet-
ter than the salaries either in other jobs in the
area or other similar jobs in the industry. The
government schools CEOs were more optimistic
regarding the salaries in their organizations and
were more specific in the factors that contribute
to their salaries than were their counterparts in
the church-based schools.
The summation of the practice responses
strengthens this proposition. The three industries
are within a .5 variation, with their responses
ranging from 2.0 to 2.5. Again, the low scores
reflect a low cognitive emphasis in their daily
operation regarding the compensation, devel-
opment, hiring, or measurement based on their
employees’ IC. Academia places the greatest
emphasis on the knowledge, interconnectivity,
and corporate awareness of the IC. Perhaps this
is reflective of the theoretical application in
contrast to the implementation of IC in a busi-
ness environment.
An Epistemology of Intellectual Capital and its Transition to a Practical Application
Figure 2. Responses by executive averages, positions graphed by question type
The service executives also rated the highest in
the question specific to their documents reflecting
organizational value of their IC, questions 1d, 2d,
and 3d, scoring between 4.5 to 5.0. Manufacturing
rated second in their documentation of the value
of IC in their job descriptions and performance
appraisal processes, 1d and 2d, though they were
not consistently forthcoming with examples of
these documents. Academia placed less emphasis
on the formal documentation of their job expecta-
tions or the defined performance expectations of
their jobs, scoring 3.5 to 4.75. In questions 1d and
2d, all executives rated the role of IC valuable, 4
to 4.5 of a possible 5, in the job descriptions and
performance evaluations.
In response to question 3d, each executive
verbalized a willingness to share his/her organiza-
tion’s job description and performance appraisal
documents, though as noted earlier, not all docu-
ments were readily available.
All industries acknowledged no financial sup-
port, scoring a 1.0, and all industries acknowledged
no formal definition of IC, with an exception of
a 1.25 score for manufacturing. Manufacturing
CEOs and CFOs responded to this question with
thoughts of employees’ connectivity to their peers
and to the organization. The manufacturing HR ex-
ecutives were more distant from these thoughts and
spoke more to employee core competencies.
Position and Question
Type Conclusions
Position and question type findings combine all
industries, comparing the findings by position as
seen in the following line graph.
Conceptually, questions 5c and 11c, CEOs
only slightly led the HR executives in looking
at the employees’ IC as a valuable asset, both
groups expressing IC characteristics in their per-
fect employee; however, they rarely considered
these characteristics when they considered their
employees for promotion, with the CEOs giving
this less attention than the HR executives. The
service HR executives most frequently consid-
ered the employees’ IC in promotions with a low
33
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
score of 1.8. CFOs only occasionally recognized
IC as an employee attribute. The CEOs and HR
executives were consistent in their perceptions of
IC value in the employee they stated would best
meet the needs of the organization, indicating the
CEOs and HR executives were looking for the
same type of employees.
In practice, questions 4p, 7p, 9p, and 10p, the
CFOs rated lowest in recognizing IC, averaging
1.5, as an organizational asset with the exception
as IC pertains to salaries, question 4p, where the
CFOs scored 4.10. HR executives scored consis-
tently higher in the practice questions averaging
2.0 to 2.5. CEOs took a strong position in question
9p regarding the role of IC in the organization’s
hiring practices, scoring 2.5 reflective of the
CEOs approach to alignment of the employee to
their perception of the organization’s vision and
performance.
All of the industries state the existence of
documents that define jobs and appraisal prac-
tices. Clarification of these documents reflects an
allusion to the organization’s mission and values.
These documents also state a need for employee
performance to be reflective of these statements.
However, the clear focus of these documents is
the core competencies and skills required to meet
the job expectations. No response or documented
behavior articulates an IC emphasis, or in some
cases even IC awareness.
All executives stated no financial allocations
were made to IC, and no asset value was assigned
to the organizations’ portfolio for IC value with
a score of 1.0. Stair case results document the
definitions for IC in response to question 6. CEOs
scored 1.75 acknowledging, at least theoretically,
that IC was important to the organization. CFOs
registered a score of 1.5, and HR scored no points
for defining IC. This is again reflective of HR’s
focus on the core competencies of the employ-
ees as defined in the job descriptions and in the
performance appraisal process.
Comparing the theoretical and the practice
behaviors as demonstrated by the executives’
34
responses, the average scores vary only by .5.
The average conceptual response was 1.75, while
the average practice score was 2.25. In both their
conceptual and in their practice responses, CEOs
rated the highest score with the HR executives
only slightly less. In both areas, the CFOs regis-
tered the lowest scores in conceptual or practical
implementation of IC within the scope of their
daily operations. While the response score distri-
bution is not surprising, the low scores reflect the
gap between the literature documentation of IC
potential impact on organizational performance
and the implementation of IC in the selected
organizations’ daily operations.
All executives interviewed stated formal
documents exist which outline the job descrip-
tions and the performance appraisals. In probing
further, it was discovered that the documents
formally describe the expectations and measure-
ment of the employee performance but place no
specific acknowledgement on the IC potential of
the employee. The academia documents allude
to the organizations’ interconnectivity and spoke
to the need for employees to understand the im-
portance of interpersonal relationships but do not
connect this working environment to employees’
intellectual capital. Manufacturing documents
spoke to knowledge of equipment and tools,
punctuality, and the quality of work but made
no attempt to measure the IC of the employee or
even to establish a need for the employee to have
or acquire intellectual capital. Manufacturing’s
training addressed defects and safety issues with
the approach to improved output. The service
industry spoke of the skills to achieve a satisfac-
tory performance but more frequently addressed
organizational mission statements about providing
a caring service or environment.
Training by all of the organizations was
directed at improved technical skills and op-
erational improvement through tangible outputs.
The training centered on defects or regulatory
requirements such as fire, safety, and harassment
issues. The availability of the training hours was
An Epistemology of Intellectual Capital and its Transition to a Practical Application
strictly dependent on operational financial stabil-
ity and availability of time to meet the regulatory
demands. In all but one manufacturing scenario,
theoretical compassion for the employee was
present, articulated, and apparently genuine.
Compensation was dependent on the results of
the performance appraisal only to a small degree
and most found often in the service industry. The
service industry percentage of salary allocation
and increases was reflective of the supply and
demand of the employee classification. The per-
formance rewards in the service industry were
partially reflective of the performance appraisal
results, with greater emphasis on budget and infla-
tion influences. Academia compensation had no
correlation to employee IC but rather to seniority
status. Manufacturing compensation was based
on area and industry current rates.
All executives were more confident in their
responses to the factual questions, 1d, 2d, and 3d;
average scores were 4.25 to 4.5 and became less
confident in the theoretical and practice questions
averaging 1.25 to 2.0. All executives became
almost reticent in their responses to the financial
questions. The question as to definition left almost
100% of the executives struggling. The terminol-
ogy appeared foreign to each of them.
Questions 8f and 12f were neutralized again
with no executive knowledge of financial sup-
port or IC valuation in the organizations’ asset
portfolios.
The definition of IC by executive position was
more clearly differentiated than this question was
in the industry comparison but still weakly met
scoring between 1.0 and 1.45. The theoretical
definition of IC by CEOs was only slightly more
defined than the CFOs, who were only slightly
better than the HR executives were. The CEOs’
approach to the definition of the organization’s IC
was more global: knowledge of organization and
intelligence. The CFOs talked about brain power
and technology. The HR executives brought up
skills, ability to think and problem solve, and
related IC more specifically to a job orientation.
There was more fluctuation in the executives’
perceptions in the conceptual interpretation of IC
value in the organizations, with the CFOs as a
group less in line with the CEOs and HR execu-
tives. All of the question types presented a small
difference in position responses of .5, reflective of
a similarity or homogeneous thinking among these
executives. The industries demonstrate a lower
level of understanding and implementation of the
intangible IC assets than the literature describes
and continue to function with a greater emphasis in
traditional book keeping and traditional skills for
human resources recruitment and promotion.
Reliability and Validity
The validity of this study addresses the data re-
ceived from the methodology. Validity is the ability
of the measuring tool to obtain the data that was
intended (Zikmund 2003). The validity may be
confirmed by the consistency and commonality of
the responses. Executives in all industries under-
stood the questionnaire vocabulary, specifically
as the queries related to the documents, practice,
and financial data. As the funnel technique ad-
dressed intellectual capital, the terminology was
not familiar, also consistently across industries.
The validity of the tool was strengthened by its pro-
fessional design. The results of the study provide
applicable data within the construct of this study,
giving this study validity. Given the geographic
context of the survey tool and the framework of
the study, a retest with the same tool would yield
the same type of results.
The sensitivity of the study refers to the ability
of the instrument to measure variability in stimuli
to the responses (Zikmund 2003). The sensitivity
of the study is documented in the variation by
industry and executive position. The tool is sen-
sitive to the role of IC as interpreted by industry
environment, its customers, its products, and by
the experiences and position of the executive.
The validity, reliability, and sensitivity of this
study’s design is accurate within its constraints
35
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
and limitations.
Study Analysis of Variance (ANOVA) mea-
sures the effects of one variable on an interval
scaled dependent variable (Zikmund, 2003). In-
terpretation of ANOVA infers the significance of
variability both between the levels of the groups
and within groups in this study. This study uti-
lizes the one-way method, rather than a factorial
ANOVA, due to the sample size, which renders
the multiple variant analyses insignificant. The
one-way analysis compares the means of the
samples from multiple populations to determine if
the findings are statistically significant. The alpha
.05 is used to determine significance interpreting
<.05 value as having a significant variance be-
tween and within groups while values >.05 have
too great a variance to make a claim.
The ANOVA analysis is defined with the in-
dependent variables considered in this analysis
as the industry and position variables and the
dependant variables considered are the questions
types (Zikmund, 2003). The independent variables
of this study each have three levels. The industry
levels are academia, manufacturing, and service
industry. The second independent variable of posi-
tion looks at the CEO, CFO, and HR positions.
Question types group the dependent variables.
The F-test score identifies the variability in the
scores of one level as compared to the scores of
the other two levels with in each group. The de-
grees of freedom (df) in this sample size remain
relatively small at 44, providing opportunity for
further study specific to those areas where bor-
derline variance significance is found. The SPSS
application completes the analysis of variances.
A. Industry Analysis by Question Type
industry Variance by Question Type
Industry variance by question type provides the
significance by industry to each question type.
Hypothesis of industry definition of IC in RQ #1
is addressed with question type 1 and 5. Question
type 1 results with a 0.008 significance and ques-
36
tion type 5 results with a significant variance of
0.002. In response to these significance variances,
a claim may be made that industry variance exists
to their definition of the IC.
Industry variance to the hypothesis of industry
valuation of their IC as identified by industry
responses to question types 2, 3, and 4 results
in a significance finding of 0.103, 0.006, and no
findings respectively. Type 2 questions, which
discuss organizational practice, result in variation
significance too large to make a claim of industry
variation. Type 3 questions significance of 0.006
indicates industries do have variation significance.
Finally, type 4 questions, which queries industry
financial support, resulted in the same response
from all industries, which results in no statistical
finding of variation.
Position Variance by Question Type
Position variance by question type provides the
significance by executive to each question type.
Hypothesis of position definition of IC in RQ #1
is addressed with question type 1 and 5. Question
type 1 results with a 0.108 significance and ques-
tion type 5 results with a significant variance of
0.218. In response to these significance variances,
the variation significance is too large to make a
claim of executive variation.
Position variance to the hypothesis of ex-
ecutive valuation of their IC as identified by
executive responses to question types 2, 3, and 4
results in a significance finding of 0.698, 0.810,
and no findings respectively. Type 2 and 3 ques-
tions, which discuss organizational practice and
documentation, result in variation significance
slightly greater than the acceptable alpha signifi-
cance of .05. These findings indicate a marginal
significance may be present. A larger sample size
is recommended to validate the significance of
the variation between executives relative to their
practice and documents illustrating their valua-
tion of their IC. Finally, type 4 questions, which
queries executive financial support, resulted in the
An Epistemology of Intellectual Capital and its Transition to a Practical Application
same response from all executives, which results
in no statistical finding of variation.
Conclusions
This study provides empirical data on organizational
valuation of their IC from the perspective of three
sets of executives in upper management. Future
research may consider obtaining additional input
from organizational members in management and at
supervisory levels of the organization, recognizing
the understanding of employee IC will differ depen-
dent on the position from which it is viewed.
Secondly, this study occurred in a very homo-
geneous environment. Future study may provide
findings that are more reflective of a broader
workforce if the study were conducted in an
environment where mobility and diversity of the
labor pool was prevalent. Recommendations for
future study may include a geographical area where
employees represent a greater ethnic diversity and
where change is closer to the national norm.
Future study may also look at industry types
with a focus on the technology industry and in-
dustries that experience greater change factors.
A future study may also consider industries that
have a corporate entity with multiple subsidiary
locations in different geographical areas to dif-
ferentiate the impact of the geographical impact
on corporate recognition of IC. Considering the
global market environment, a global assessment
may be made as to ethnic or cultural differences
in recognition of organizational IC, e.g. United
States versus European or Asian.
Based on the review of the literature, additional
deliberation is necessary in understanding or
bridging the gap between theorists and executives’
perceptions of organizational recognition of IC.
As discussed earlier, organizations act on those
resources that enhance their survival. This study
demonstrated that those resources evolved from
water, seeds, and stones; to machines; and finally
to high tech information systems. Although, it is
agreed that IC is a valuable resource, it has not
been clearly demonstrated how the leaders of an
organization efficiently convert IC to a resource
that is accessible and managed. Based on the
characteristics of the 21st century, executives
are searching for a “tool” that will give to their
organization a competitive edge in a very com-
petitive and aggressive global market. However,
it is because of these 21st century characteristics
that resources surviving as this “tool” that gives
the organizations the competitive advantage
must be efficient, assessable, measurable, and
easily and quickly implemented by the team of
managers responsible for the daily operations of
the organization.
Intellectual Capital is a valuable tool just as
stone was in the Ancient Era. However, just like
stone, IC must be molded into a user-friendly tool
that will allow the user efficient use in the daily
operations of his or her job. Executives in this
study have espoused a genuine concern for their
employees and the employee intellectual capital.
However, these executives have not benchmarked
an actual practice of assigning value to their IC
asset or the contributions of their organizational
intellectual capital contributions.
inTEllECTuAl CAPiTAl
sTATus ToDAY
During the past one to two decades researchers
have identified a link between organizational per-
formance and that organization’s human resources,
specifically in the information era the organiza-
tion’s intellectual capital. A study by Youndt and
Snell (2004) synthesize the literature finding by
the following. First, there appears to be consistent
empirical finding that human resources assets and
practices contribute to the strategic well being of
an organization. Second, there remains a lack of
consensus on the single best practice or tool for
organizational survival.
The 21st century business characteristics com-
prise a hyper-competitive, global environment,
37
 An Epistemology of Intellectual Capital and its Transition to a Practical Application
which is complex and radically shifting, with an
independent mobile workforce (Cunard, 2005).
Cunard goes on to say the selected tools for this
environment must be muti-user friendly for a
variety of stakeholders. These tools must ‘fit’
a myriad- dimensional market with a specific,
measurable ROI. Business thrives is an environ-
ment that is focused on efficiency, productivity,
and profitability (Pike et al, 2006). The tools
selected by these businesses will be required to
meet these criteria.
Executives are typically straight forward in
their needs. They expect to be able to describe
and define their tools and methods in an articu-
lated succinct manner. These executives desire
to measure in concrete terms the benefits and
costs associated with their production of goods
and services. They expect to be able to tell their
Boards the return on their investments. Does this
describe the intellectual tool?
We must continue to address the disconnect
between academia and business to maximize
the resources we have. Ahuja et al (2005) state a
process is needed that demands the involvement
of both academia and industry. This process
must meld academic and industrial perceptions
and develop flexible programs that meet both
communities aspirations (Ahuja et al., 2005).
Thompson et al. (2007) recommend a sharing of
industrial best-proven practices that would provide
for curriculum contexts. Bridging the gap between
business and theorist is an ongoing process that
must continue to be addressed.
As communities of academicians, researchers,
theories, and executives we share commonalities.
We also have major differences. Business execu-
tives will always search for an operational tool
that will accentuate their strengths and minimize
their obstacles. The final call has not been made
whether intellectual capital is the tool of choice
for organizations in the 21st century. Clearly, the
work is not complete for executives to rest the
future of their organization on this tool solely.
38
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44

Chapter 3
Multinational Intellect:
The Synergistic Power of Cross
Cultural Knowledge Networks
Leslie Gadman
London South Bank University, UK

Robert Richardson
Mental Health Associates, USA

ABsTRACT
The world of international business is experiencing transformations of such magnitude that existing
business models have become either invalid of incomplete. A fundamental force behind these disruptions
has been the emergence of the digital networked economy (Ridderstrale and Nordstrom 2004, Flores and
Spinosa, 1998) with its supporting internet and communications technology. One significant manifestation
of this economy is the emergence of business models designed to gain competitive advantage by bonding
with customers, suppliers and complementors (Wilde and Hax 2001). From the multinational perspective
outsourcing and off - shoring have been the most common examples of this approach, but user lead in-
novation models (von Hippel 2005) based on Open Source methods are rapidly emerging as the leading
source of competitive advantage. Commitment has been argued to play an important role in determin-
ing the success of these relationships (Abrahamsson and Livari, 2002) suggesting that entrepreneurs
must be adept at building and maintaining commitment based value networks (Allee 2004, Sveiby and
Roland 2002, Savage 1996, Gadman 1996, Adams 2004). This paper considers the challenges associ-
ated with commitment in multinational value networking and finds them to be most problematic in the
diffusion of innovation where increasing levels of commitment are required across national boundaries
and cultures. (Mauer, Rai and Sali 2004). Current research into core commitment structures of virtual
multinational communities is not been well established. By analyzing data from a range of sources the
paper concludes that the success of value networks depends on the desire of participants to acquire
history - making identities (Gauntlett 2002, Spinosa et al. 1997) by maintaining identity defining com-
mitments across the network. Implications for theory and research are discussed.

DOI: 10.4018/978-1-60566-679-2.ch003

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Multinational Intellect
inTRoDuCTion
Existing theories of entrepreneurship focus on
the imagination and creativity of the entrepreneur
(Mongiovi 2000) and view market imperfection
as the driver of enterprise. This view has led to
the formation of a manufacturer – centric culture
which has been the mainstay of commerce for
hundreds of years (von Hippel 2005). In contrast,
the networked economy is producing new business
models based on value networking (Ridderstrale
and Nordstrom 2004, Flores 1998). Emerging
economies are finding themselves on the cusp
of these tectonic shifts as their low cost business
models are failing to attract multinationals who
regard people as a rich source of intellectual capital
and innovation (Sveiby and Roland 2002, Savage
1996, Gadman 1996). Allee (2004) describes value
networks as webs of relationships that generate
material or social value through complex dynamic
exchanges of both tangible and intangible goods,
services, and benefits. Examples range from
Southwest Airlines, Dell, IKEA, Lastminute.com,
and Google who have successfully found new ways
to accomplish old goals, to Burton Snowboards,
CEMEX’s Patrimonio Hoy and the MIT Media Lab
Wind – Up Lap Top who are doing entirely different
things and shaping marketplace trends (Hax and
Wilde 2005, von Hippel, 2005, Flores and Spinosa
1998). For today’s multinational entrepreneur the
challenge is to be competent in designing, leading
and managing value networks which span both
user and manufacturer - centric cultures across
national boundaries. The underlying assumption
behind these networks is that they are fundamen-
tally architectures of synergistic commitment
where integrative interaction (Richardson 2003)
among members leads to emergent innovation
far greater than that achieved by individual effort
(Gadman 1996). This chapter proposes that for
entrepreneurs wishing to disrupt market trends
rather than follow them a core competence is
the skill to manage across national relationships
by maintaining commitment to a shared concern
among all stakeholders. For example, Jake Burton
spent the early part of the 1990’s showing people
how snowboards were a viable alternative to skis
even though the latter were perfectly adequate.
Today, it is hard to imagine a world without the
snowboard.
iDEnTiTY BuilDinG AnD
ARCHiTECTuREs oF CoMMiTMEnT
According to Adams (2004) the internet is revo-
lutionary not because of the great search engines
and enormous library of interconnected informa-
tion but because it’s two-way communications
technology allows large numbers of people to
interact to satisfy concerns. Indeed commitment
can be viewed as a state of attachment that defines
the relationship between an actor and an entity
(O’Reilly and Chatman 1986). The quality of this
attachment can be measured by the strength of the
commitments generated as one actor, group or
organization of actors delivers results to another
actor, group or organization in such a way that
there can be agreement that their concerns were
satisfied (Winograd and Flores 1987; Flores and
Spinosa 1998). The relationship can be viewed
in terms of focus and strength (Brown 1996),
durability (Abrahamsson 2001) and component
type (Meyer and Allen 1991). These six aspects
are common to all commitments. Table 1 briefly
describes these six aspects of commitment.
Depending on the target of commitment and
the circumstances, an actor may be committed to
a value network in different forms. They may feel
its benefits (affective component) (von Hippel
2001). They may have an emotional and rational
investment in the project which drives their con-
tinued participation (continuance component).
Finally, the organization is bonded by the strength
of the collective words of their members and
personal identity based on the extent to which a
person’s word is or is not their bond (normative
component). Most researchers agree that it is the
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 Multinational Intellect

Table 1.

Aspect of Description
Commitment
Focus Defines the target of one’s commitment. This target can be an organisation, project, community
Strength Defines how deeply an actor or group is attached toward an entity. An actor is more or less committed than simply
committed or not.
Terms Define what has to be done in order to fulfil the requirements of the commitment. E.g. a contract is an explicit
request outlining conditions of satisfaction.
Durability Depending on the commitment target, the durability of the personal contract varies. E.g. commitment to career
may last a lifetime while commitment to a project does not.
Component type Commitment is formed from its components. At least three forms of commitment exist: Affective, normative and
or form compliant. These forms build up to a composite which changes over time. They may also be regarded as the es-
sence of commitment which engenders attachment.
Level of The unit of analysis in commitment studies. 1) Individual commitment 2) group or team 3) organisation. Each can
commitment have a commitment towards an entity

affective component which is the most desirable
(Meyer and Allen 1997) because it is that aspect
which enables bonding at each level of commit-
ment. For example, FedEx and Amazon.com use
the internet to establish bonding through conver-
sation - based interactions where they commit to
be reliable. They do this by positioning strategies
like letting customers know what’s going on.
Alerting customers if problems occur and offering
counter-proposals designed to resolve the problem
to a customer’s satisfaction. Using customer and
inventory databases and well-integrated finan-
cial and logistical systems, they use the internet
to build legitimacy through core commitment
structures based on trust (Winograd and Flores
1987). Value networks work in the same way in
that they are made up of conversation generated
commitment structures formed by the exchange
of words in real and virtual space that bond actors
to each other. This rich network of commitments
delivers value by addressing the concerns of
those involved and ultimately those who receive
the benefits of the network’s output. Therefore
this paper proposes that the essential purpose of
commitment based value networks is to achieve
synergistic outcomes which are far greater than
those achievable by individual effort alone (Rich-
ardson 2004). The affective component of value
networking is the actor’s willingness to give their
word and the ability to carry it out. This is one
of the key components of identity building. For
example, the late Body Shop founder and manag-
ing director Anita Roddik talked of her personal
identity being inextricably linked to her corporate
mission and Nicholas Negroponte, the co-founder
of the Media Lab at the Massachusetts Institute of
Technology refers to his $100 wind-up powered
laptop as “the most important thing I have ever
done in my life. If we can make education better -
particularly primary and secondary schools - it will
be a better world.” (Ricciuti 2005). This suggests
that richly synergistic communities attract people
who are identity seekers who wish to make the
world a better place as a result of their actions.
Research on the core commitment structures of
multinational value networks is uncommon and
the overall lack of a theory suggests a qualitative
grounded approach to develop analytical catego-
ries and propositions (Glaser & Strauss 1967,
Meyers 1997, Strauss & Corbin 1990). The theory
development in this paper is based on The Tropical
Diseases Initiative (TDI) a multinational decen-
tralized, community-wide effort to conduct R&D
for neglected diseases. The paper is organized as
follows; firstly it provides a review the research
method employed in the study. It then provides a

46
Multinational Intellect
history of TDI related development data. It then
proceeds to theory induction by an analysis of
contributing behaviour exhibited by members of
TDI. The paper concludes by discussing implica-
tions of the study for theory and research.
REsEARCH METHoD
This section describes the research method em-
ployed in the study. It proceeded in three phases:
Sampling of case, data gathering, and data analysis.
One case was selected in order to increase the
depth of the analysis, acquire and report experi-
ence with the gathering of new and unfamiliar
data (Numagami 1998). TDI was sampled because
computation is playing an increasing role in bi-
ology and the convergence between computing
and biology suggests that comparisons might be
made with studies of user innovation networks
like Open Source (Raymond, 1999). It is further
hoped that TDI would reveal areas as yet undis-
covered in current research into identity creation
in collaborative communities. TDI also offered
an ideal sample because it was in its formative
stage with only four individuals making initial
contributions. The data in this paper covers the
opening period of the TDI project (2004) and
studies events occurring during its critical launch
up to the present time. Data were gathered from a
range of different sources and occurred between
February, 2004 and January, 2008. The analysis
was inspired by the writings of Winograd, Flores
and Spinosa (Winograd and Flores 1987) and their
theories of commitment in organisations which
fitted closely with the user – centric innovation
focus of this paper. They define commitment in
organisations as a set of characteristics and their
relationships, which together describe the process
of committing. The characteristics, relationships
and actors performing them are identified and
described in this section on the basis of the analy-
sis. Winograd and Flores (1987) have opened the
discipline of tracking, mapping, and combining
commitments based on the constituting power of
human speech. As they put it, “mapping social
institutions in terms of their concern and com-
mitment structure tells us what is genuinely new
and what is a new way to accomplish old goals”
(Flores & Spinosa 1998, p. 357). In their writings
on computers and cognition, they propose a general
structure for forming commitments for actions
to satisfy concerns and by focusing on concerns
and commitments, new domains of assessment
emerge. When such domains of assessment are
shared amongst a user – centric community they
can lead to the identification of new institutions
arising alongside old ones as was the case with
snowboarding and its emergence as a viable chal-
lenge to the ski industry. In this paper the social
institution to be mapped is the TDI as it takes on
a radically new approach to drug discovery in the
manufacturer – centric pharmaceutical industry. If
this is accepted, TDI can be seen as a new institu-
tion arising alongside and old one and possibly
a genuinely new way to accomplish old goals. If
we are to evaluate whether a change has occurred,
we have to look at the changes in concerns and
commitments, i.e., the changes taking place in
the respective actors’ commitment nets. “Once
we become familiar with the way commitments
drive action, we no longer believe that we have
to understand in advance the component parts of
whatever social action we seek. Rather, we see
that we must identify concerns and begin forming
commitments to address them. The basic organis-
ing skill is forming and managing a commitment
to deal with a concern. “On the basis of one com-
mitment, many others can be grown” (Flores &
Spinosa 1998, p. 357).
Focusing on identity creation, legitimising and
positioning behaviours, data were gathered from
the project’s web site which contained a “wiki”
(a website that anyone can edit and contribute to)
and discussion forums which were archived on
TDI’s website and open to anybody who wanted
to discuss the project. Finally, in order to obtain
contextual understanding of the project, data
47

were gathered from publicly available documents
related to the open source model in general and
to the TDI project in particular. Among the most
important sources were the TDI web pages (e.g.
the original concept paper by Maurer, Rai and Sali
(2004), magazine articles, news features and links
to other projects attempting similar challenges).
TDi HisToRY AnD DEVEloPMEnT
CHARACTERisTiCs
This section provides a brief history of the TDI
project, its wider context, objectives and an over-
all characterization of the development process.
The current manufacturer – centric approach to
drug discovery works up to a point, but it is far
from perfect. It is costly to develop medicines
and get regulatory approval. The patent system
can foreclose new uses or enhancements by out-
side researchers. And there has to be a consumer
willing and/or able to pay for the resulting drugs,
in order to justify the cost of drug development.
Pharmaceutical companies have little incentive to
develop treatments for diseases that particularly
afflict the poor, for example, since the people who
need such treatments most may not be able to af-
ford them. It is in this environment that a number
of users comprising medical biologists, lawyers,
entrepreneurs and health-care activists have sought
improvements. They have suggested borrowing
the user – centric “open-source” approach that has
proven so successful in another area of technol-
ogy, namely software development. Calling their
approach “open source drug discovery,” TDI aims
to significantly reduce the cost of discovering,
developing and manufacturing cures for tropical
diseases. The focus on virtual drug discovery and
development as operationalized through these
partnerships brings many advantages, as well as
scientific and managerial challenges. Some are
common to those faced by all drug R&D ventures
while others seek drugs with a very low cost of
manufacture that are easy to use in resource-poor
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Multinational Intellect
environments. Open-source approaches have
emerged in biotechnology already. The interna-
tional effort to sequence the human genome, for
instance, resembled a user – centric or open - source
process. It placed all the resulting data into the
public domain rather than allow any participant to
patent any of the results. User – centric methods
are also flourishing in bioinformatics, the field
in which biology meets information technology.
This involves performing biological research us-
ing supercomputers rather than test-tubes. Within
the bioinformatics community, software code and
databases are often swapped on “you share, I
share” terms, for the greater good of all. The user
– centric approach works in biological-research
tools and pre-competitive platform technologies.
The question now is whether it will work further
downstream, closer to the patient, where the
development costs are greater and the potential
benefits more direct.
While from a multinational perspective these
initiatives impose no national boundaries, they
do impose boundaries of another kind related
to information sharing and knowledge genera-
tion and diffusion. For example, TDI founders
Maurer, Rai and Sali (2004) asked the question
“Would universities and corporations really let
their people volunteer? Won’t they insist on intel-
lectual property rights?” Their believed that life
sciences companies would not stand in the way of
research that did not benefit them directly. Indeed
from a commitment perspective TDI was able to
encourage universities and companies to donate
the data, research tools, and other resources which
added to the strength of the project. The reason
for their commitment was they had little to lose
because the value of their intellectual property
depended almost entirely on US and European
diseases. For this reason, it cost them very little
to share their information with tropical disease
researchers.
Multinational Intellect
THEoRY inDuCTion
In this section propositions are developed towards
a theory of core commitment structures in virtual
multinational user - led communities engaged in
the process of innovation. Through the application
of commitment networks, the propositions are
grounded in documented behavioural strategies
of founders attempting to bring their innovative
ideas into being through collaborative efforts. Ac-
cording to Abrahamsson (2002) the key concepts
constituting the basis of the commitment net are
actors, drivers, concerns, actions and outcomes.
See figure 1. These categories are introduced and
defined in the following sections.
Actors
There are three levels of actors: individual, group
and organization (Hage 1980, Curtis et al. 1988).
For the purposes of analyzing the development
Figure 1.
of commitment networks in TDI it is beneficial
to distinguish explicitly between these different
organizational levels for two reasons. First, each
organizational level actor participates in TDI
for different reasons, is not necessarily from the
same nation and subsequently is affected by TDI
differently. Second, the distinction between differ-
ent organizational level actors allows the layered
analysis of the changing commitment forms and
drivers in the commitment process, which in turn
provides a richer view into the dynamic complexi-
ties of the commitment phenomenon in the case
studied. Adapting the levels of actors to reflect a
more interpretive approach the analysis regards
actor roles as respectively: improving, integrating
and operating (Gadman 1996). See figure 1.
TDI attempts to change these commitment
networks at each level, so as to increase the ability
of the network to produce higher quality results
within given time and resource constraints and
to allow individual members to understand the
49

benefits of the TDI core mission. As one of the
founders said, “Generally speaking, I’m interested
in the web and emerging technologies, and how
these can be applied to the scientific process. The
TDI concept is an excellent example of this, and
potentially a way to do a lot of good, hence my
interest”. The leadership action takes place at the
improving level where the task is to sponsor the
project by providing the resources for performing
the improvement actions. Maintaining unique-
ness and direction through monitoring progress
and promoting the TDI core mission and values
throughout the organization takes place at this
level. For example, during one conversation the
founders talked about the way TDI “fills the current
gap in early-stage drug discovery”. It also aims
to “tip the economics of developing downstream
drugs”. As such, it provides a service to spon-
sors and the Virtual Pharmas they have funded
to manage development. They also recognised
that their “customers” concerns had to be taken
into consideration if TDI was to be maximally
effective. They needed pharmaceutical and bio-
tech companies to commit their scientists to the
effort, to provide access to proprietary data and to
grant funding. For example, in one conversation
the founders discussed which types of scientists
and areas of science were important. “Do we
have specific examples of scientists who will (or
ought to) be involved”? They felt the TDI would
need non-scientists, too. “Social scientists and law
professors will be helpful in designing solutions to
governance and IP policy questions. Lawyers will
Table 2. Actors in TDI context.
Commitment Net Actor Role in TDI
Level
Improving Local or external to Leading
TDI
Integrating Internal to TDI Managing
Operating Internal or external to Key stakeholders
TDI
50
Multinational Intellect
be helpful if (a) the TDI site decides to adopt “click-
wrap” licenses restricting what people do with its
discoveries, and (b) TDI negotiates confidentiality
agreements in order to obtain access to proprietary
data”. This is a key concept in the commitment net
formation where different organizations must also
be networked into the TDI project. For example,
the founders feared that university administrators
would be concerned that scientists were contrib-
uting information that could be patented by the
university. For this reason, each operative level
also included external actors working in joint col-
laboration with groups of university researchers
and internal actors within the TDI organization.
Operating actors were represented by the vari-
ous scientists, lawyers, administrator, sponsors,
and other volunteers who made up the network.
As another founder put it, we need to determine
which types of scientists and areas of science
are important. Do we have specific examples of
scientists who will (or ought to) be involved?”
Another replied, “TDI will need non-scientists,
too. Social scientists and law professors will be
helpful in designing solutions to governance and
IP policy questions. Lawyers will be helpful if (a)
the TDI site decides to adopt click wrap licenses
restricting what people do with its discoveries,
and (b) TDI negotiates confidentiality agreements
in order to obtain access to proprietary data.”
These TDI participants managed and implemented
planned process improvement actions. It is these
projects that ultimately adopted new behaviour
patterns. See table 2.
Function in TDI
Authorization of budgets and resources;
provide leadership on strategy interpretation; monitor prog-
ress; resolve organizational issues; promote TDI goals
Manage interpretation and implementation of strategic plans
Perform key tactical activities on time and to agreed expec-
tations.
Multinational Intellect

Commitment Drivers believed that “instead of financial incentives, TDI

Research in other disciplines (e.g., Sabherwal &
Elam 1995, Meyer & Allen 1997) has shown that
the development of commitment is influenced
by various drivers. The drivers identified in or-
ganizational behavioral literature are mapped to
the proposed four categories. Research has also
evidenced that the resulting commitment works to
strengthen or weaken the drivers (e.g., Mowday
et al. 1982). A potential driver is anything affect-
ing the commitment of the actors and can occur
in the macro and micro environment as well as
within the organisation, group or team. It is for
this reason that commitment can never be taken
for granted (Table 3).
Certain drivers, therefore, are more relevant
than others. For example, scholars have observed
that newcomers joining technical projects must
demonstrate some level of technical expertise as
well as understanding of what the community
expects in terms of behaviour, in order to make a
contribution to technical development (Lovgren
& Racer, 2000; Wenger, 1997). Alternatively, the
TDI founder’s believed that the TDI project should
be targeted toward scientists from universities
and industries who “should want to join for the
reasons that people often join open source projects
(enjoyment from doing creative tasks, recognition,
altruism etc.)” For example, the three founders
offers volunteers non-monetary rewards, such as
ideological satisfaction, the acquisition of new
skills, enhancement of professional reputation,
and the ability to advertise one’s skills to potential
employers.” They wanted to attract “capable young
scientists who are frustrated by the pace of early
career advancement. Find ways to directly fund
young investigators. Give them decision-making
power”. They needed pharmaceutical and biotech
companies to give permission for their scientists
to volunteer, to provide access to proprietary
data and to grant funding. For example, in one
conversation the founders discussed which types
of scientists and areas of science were important.
“Do we have specific examples of scientists who
will (or ought to) be involved”? They felt the TDI
would need non-scientists, too. “Social scientists
and law professors will be helpful in designing
solutions to governance and IP policy questions.
Lawyers will be helpful if (a) the TDI site de-
cides to adopt “clickwrap” licenses restricting
what people do with its discoveries, and (b) TDI
negotiates confidentiality agreements in order to
obtain access to proprietary data”.
Concerns and action
The concepts of concern and action together
constitute commitment however, action by itself

Table 3. Drivers for TDI projects.

Commitment Driver Description Organisational Behaviour Indicator

Project Reflects the objective features of the TDI project, such as
costs and benefits. Project drivers indicate reasons for TDI
to exist.
Psychological Psychological drivers involve key individuals in the project,
reflecting properties such as the need for identity as an achiever,
past historical success, etc.
Social Social drivers originate from a group rather than an individual.
These drivers are, e.g. power and politics, or public identifica-
tion with the TDI project.
Structural Structural drivers represent the contextual conditions surround-
ing the project: the environment for TDI activities.
Investments: transferability of skills.
Alternatives: existence of other solutions.
Work experiences: job scope, employee role, per-
sonal fulfillment, importance and competence.
Investments that are hard to reciprocate
Organizational characteristics: fairness of policy,
communication

51

does not bring about commitment but might be
interpreted as a sign. This is consistent with the
views expressed by the behavioral school of com-
mitment research which emphasises the role of
action as commitment target. Acording to Oliver
(1990) “commitment targets should be actions
rather than objects, as it is virtually impossible
to describe commitment in any terms other than
one’s inclination to act in a given way towards
a particular commitment target” (p. 30). Conse-
quently, the research sought out evidence of the
strength of a person’s commitment by observing
patterns and frequency of activity directed at ad-
dressing concerns. For example, in the TDI much
of the early conversation took place among the
founding partners (actors) who played a major
part (at the improving and integrating levels)
in setting up the initial communications infra-
structure. For example, in an attempt to address
concerns for a communications platform, one
founder volunteered to approach his employer
saying, “In principle, NPG (Nature Publishing
Group) may be able to provide a home for the site.
I’d need to check this with the right colleagues
once we’ve worked out what kind of site we’re
talking about”. One shortcoming of the research
was an inability to say for sure exactly what the
deep psychological drivers were and how they
were directed toward meeting the overarching
concerns of the project. Consequently, while it
was not possible to accurately gauge the level
of commitment held by the founders of the TDI,
their patterns of actions suggested this to be the
case. For example, the founders expressed their
concern that initial conditions were established
such that potential joiners would recognise the
benefits of membership. As one person said, “If
TDI is able to keep data confidential, joining will
cost nothing. Companies will receive benefits in
terms of moral satisfaction, keeping employee/
scientists happy, and good publicity on a topic that
is politically sensitive for them. Benefits should
therefore outweigh costs”.
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Multinational Intellect
outcomes
Only actions produce outcomes and outcomes
bear relevance in this research since it has been
shown that it is on the basis of outcomes that fu-
ture actions are planned (Newman & Sabherwal
1996). For example, if the outcome of a TDI action
was considered unsatisfactory for the sponsor,
resources could easily have been withdrawn and
the project cancelled. Therefore, an outcome has
an influence on its operating environment – i.e.,
on concerns and actions and drivers. In a study
on implementing the Lotus Notes groupware tool
in an organization, Orlikowski (1992, 1993) dis-
tinguishes (among others) between intended and
unintended outcome produced by this groupware
tool for the organization. Similarly, TDI activities
led to intended and unintended outcome (Kautz
1999), which affected both the drivers, concerns
and future actions. In TDI, unintended outcomes
may take the form of dissatisfaction with an in-
troduced target, which may subsequently lead to
difficulties in the co-operation between different
operations. Unintended outcome may also be
positive. For example, accidental discoveries
may clear the way for a range of new TDI activi-
ties (that were initially not intended). Intended
outcome reflects the fact that the TDI project has
achieved the goals set for it.
The Commitment Process
The commitment network model identifies the
main analytical elements used for explaining the
commitment processes in TDI i.e. TDI concerns,
change in commitment drivers and in the form
of commitment, and outcome. Concern, as was
stated earlier is an ongoing generalization of needs
and therefore, guides actors’ attention to certain
targets. For example, TDI’s founders were con-
cerned about incentives to attract members, “A
key goal will be to satisfy companies that their
data will, in fact, be confidential. Although it is
easy to dream up such options, it will be much
Multinational Intellect
more practical to have this discussion directly with
prospective partners”. TDI projects were initiated
for some specific reasons. These reasons could be
interpreted as the concerns that had been found
to cause problems to civilised society in general
and the pharmaceutical industry in particular.
Therefore, a TDI project must embody a concern
that directs the actions of those in the TDI project.
If only actions are pursued without acknowledg-
ing the driving concern it is reasonable to expect
that the project will face fundamental problems
because it will fail to meet the needs of some spe-
cific concerns. For example, early on participants
were concerned that the TDI would be viewed as
an attempt to undermine proprietary drug develop-
ment and therefore to be against their long-term
interests. The founder’s response was, “I suppose
you’d have to ask them. I think the threat to their
multi-billion dollar enterprise is fairly limited.
The main thing we do is take pressure off with
respect to L.D.C. issues. My guess is that we’re
a net plus for them”. Another key concern was
the establishment of a communication platform
which involved the target of increasing the ef-
fectiveness of idea sharing, theory generation and
knowledge dissemination. It was determined that
this could be achieved by the formation of a home
page. Thus, the content of TDI concern was the
effectiveness of the communications activity and
the means used for achieving the goal was the
establishment of a TDI home page. This concern
had then to be transferred to the operational level
of the commitment net for action. In addition, the
concern had to be transferred to the improving
level of the commitment net in order to ensure the
availability of financial and human resources for
executing it. The means by which improving and
operating commitment nets are changed are the
core elements of TDI itself. These TDI elements
constitute the infrastructure and the means needed
for performing TDI activities through which the
different levels of commitment nets change. TDI
commitment processes are concerned with study-
ing how TDI concerns and subsequent actions
come about in an actor’s commitment net. This is
achieved when the changes in commitment drivers
and forms are identified in each TDI phase along
with the resulting outcomes.
ConClusions AnD iMPliCATions
The purpose of this paper has been to apply a com-
mitment based analytical model (Abrahamsson,
2002) to the Tropical Disease Initiative (TDI) to
understand the motivations and strategies sup-
porting the desire of its actors to engage in the
discovery and commercialisation of innovative
cures for tropical diseases. The way these actors
went about their task was defined and explained
using a commitment networking model. On this
basis, the research suggested that value networks
like the TDI are commitment based. Three levels
of networks – improving, integrating and operat-
ing – were defined and network elements – actors,
drivers, concerns, actions, and outcomes – were
introduced. As a result of this analysis, five as-
sumptions were induced: 1) that actors satisfy a
strong normative need to comply with the prin-
ciples and values of the network by continually
monitoring and adapting to other’s perceptions, 2)
the belief that the internet increases the capacity
to form and manage networks of commitments
but does not necessarily increase the quality of
those commitments, 3) the idea that individual,
corporate and national identity is based upon the
perceived affective strength of a person’s com-
mitment to address the specific concerns of the
community, 4) the notion that self - identity is
beyond the reach of rational cognitive explanation
until revealed in the outcomes of committed ac-
tion. This last point is consistent with the central
argument put forward by Kierkegaard (1985) that
our primary access to reality is through our com-
mitted action. These five assumptions challenge
existing commitment research in that they show
that commitment does not develop in linear and
causal fashion and is controllable. On the contrary,
53

the study shows that personal and national identity
and the commitment it engenders is both ambigu-
ous and affective in that actors feel the rightness
of commitment before they ever cognitively ar-
ticulate it. Consequently, multinational enterprise
leaders need to be able to declare to followers the
public recognition they seek and what is important
about their life if they are to build the kinds of
commitment based value networks that will help
actualise their innovative ideas.
Given the concerns of this study, the research
suggests that commitment based value networks
are primarily about the effective actualisation
of innovative ideas. The study also shows that
in order to shift the concerns of a multinational
culture, entrepreneurs must clearly articulate the
concern they are addressing. They must create and
maintain clear focus and develop a deep sense of
commitment among diverse sets of followers. As
the paper illustrates, in the early stages of the TDI
formation it was assumed by the founders that
“capable young scientists who are frustrated by the
pace of early career advancement” would want to
join, “for the reasons that people often join open
source projects (enjoyment from doing creative
tasks, recognition, altruism etc.)”. According to
Flickstein (2001) our self-image requires that we
learn to objectify our own mental processes. This
recognition - based form of identity suggests that
our relation to ourselves depends first and fore-
most on communal practices in general and on the
view of others as they are directed towards us in
particular. Our sense – of – self, so far as it relates
to something important beyond mere coping with
our environment requires that we be recognised
by others and that we are socialised into norms
for right behaviour according to which our actions
receive positive and negative sanctions by our
communities. Self - identity or self - image is a
reflexive process which has continuity by virtue
of a person’s ability to maintain an ongoing sense
making narrative such that its orientation in the
past allows anticipation for the future (Gauntlett
2002). The research reveals a complex interaction
54
Multinational Intellect
between the commitment drivers and the success-
ful outcomes of the project especially the unfolding
and alteration of commitments in time and through
time at the improving, operating and integrating
levels as circumstances change. In particular, it
shows how over time the objective features of
TDI in terms of cost and benefits diminish as
obstacles are encountered and psychological and
social drivers play a greater part. Indeed it is pos-
sible to say that TDI could potentially fail over
time if attention is not paid to such changes in the
concerns of its commitment network.
Some limitations confront the research. Firstly,
the constructs and propositions are developed
based on data from one case only. Although
care was exercised to make the categories and
the constructs operational, external validity of
the propositions must be verified across a wider
sample of cases. Also, due to the focus on self –
image through committed and successful action,
personal interviews would provide an opportunity
to deepen understanding of the psychological
drivers of the actors and the way the intended
and unintended consequences of their actions
shaped their self image. While the exploration
on the commitment concept has been focused at
the individual level, a more context dependent
approach might also be useful. However, one
may argue that it is ultimately the individual who
makes the decision to change his/her behaviour
in line with the ultimate goal of TDI.
The study has implications for research into
the impact of value networking strategies on
strategic management. Firstly, it is important to
recall that much strategic planning in business is
preoccupied by public reputation, i.e. what the
public recognises as important about the business
and its tradition. The new focus on strategy in
both business review articles and in boardrooms
reveals the confusions and difficulties corpora-
tions are having over determining their self - im-
age (Porter 1980, Prahalad and Hamel 1990). In
taking the position that personal and corporate
identity is neither wholly the result of total com-
Multinational Intellect
mitment (Gergen 1991) nor wholly the result of
recognition - based identity (Hegel (1979), the
implications require a deeper consideration of
the challenges surrounding collaborative business
models especially those based on the Web (Wilde
and Hax 2001).
Secondly, by suggesting that personal and cor-
porate identity are outcomes of the well positioned
enactment of a compelling concern to make some-
thing better than it was before, how do business
leaders develop successful positioning strategies
such that their committed actions result in the
emergence of a new world alongside the old?
Thirdly, empowerment of individuals is a key
part of what makes value networks successful,
since in the end innovations tend to come from
small groups, not from large, structured efforts.
The study shows that value networks don’t rely on
containment or tight control of the environment
to maintain their position, but rather, an exquisite
balance and ability to respond to rapidly changing
conditions. This kind of responsiveness is hard
for a large company to achieve, but not impos-
sible, especially in the presence of the kind of
competition that virtual networking brings back
to the market.
Finally, the Internet is a value network’s great-
est enabler, making large decentralized projects
possible. On the other hand, intellectual property
is its nemesis and has the potential to stifle and
restrict the creative capacity of free-thinking
scholars, programmers, scientists, designers and
engineers. There is increasing evidence to suggest
that a philosophy, a strategy, and a technology have
aligned to unleash great innovation. The internet
is simple, yet its power is profound. The power
to create integrative interactive emergence by
bringing people together in committed conversa-
tions that produces outcomes far greater than the
sum of the individual parts. The distribution of
knowledge is the key contemporary task and if
knowledge empowers people, are contemporary
systems ready for the disruptive influence of
‘openness’?
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57
58

Chapter 4
Dynamic Capabilities
in R&D-Networks
Arla Juntunen
Helsinki School of Economics, Finland

ABsTRACT
This chapter addresses collaborative business networks at the level of industry/cluster networks, which
is important and relevant from the strategic management perspective in several industries. Collaborative
networks are seen to offer firms collective benefits beyond those of a single firm or market transaction.
The author of this chapter aims to contribute to the development of theories of knowledge manage-
ment, organizational learning and a resource-based view of the firm. The initial argument is that the
characteristics of the task that organizations try to accomplish through forming a specific collaborative
network influence the organization’s intellectual capital, the capabilities developed and required. This
chapter is based on a longitudinal case study in the ICT-sector.

inTRoDuCTion beginning of 2000, long-term forecasting was dif-

Understanding major change factors like managing
data and knowledge and the fast pace of technology
change that have affected organizations in the late
1990s, this study analyzes the creation and develop-
ment of dynamic capabilities in a business network
context, and reviews how the capabilities developed
assisted the organizations in gaining competitive
advantage. As a consequence of rapid industry-level
changes in the ICT-sector in the 1990s and at the
DOI: 10.4018/978-1-60566-679-2.ch004
ficult due to the dynamic evolution of the industry
and actors and because technologies had undergone
rapid development, leaving it hard to know which
would be the dominant players, technologies and
solutions of the future. The convergence of media,
IT and telecommunications technologies were
creating new business possibilities. As a result,
flexibility and adaptability to change were essen-
tial for firms to survive. Nevertheless, the years of
1990-2005 produced a major structural change in the
ICT-sector with firms responding to those changes
with new organizational structures, introducing new

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Dynamic Capabilities in R&D-Networks
products and services and learning new skills and
competencies. It required efficient collaborative
systems to transfer information and knowledge
within the organization and between the partici-
pants of R&D collaborative networks. This all
required an efficient process management, agile
leadership, good communication skills with R&D,
IT departments and the senior management. In
other words, it required active intellectual capital
management within the organization to gain the
full knowledge and capability capacity of the
organization in use.
In a partnership, companies are highly commit-
ted to the ongoing relationship over an extended
time period, and the motivation behind this part-
nering is a joint objective of a mutual benefit
(Dyer & Nobeoka, 2000; Dyer et al., 1998, 59-62).
Anderson and Narus (1990,42) defined a working
partnership between two companies as “the extent
to which there is mutual recognition and under-
standing that the success of each firm depends in
part on the other firm, with each firm consequently
taking actions so as to provide a coordinated effort
focused on jointly satisfying the requirements of
the customer market place.” Cooperation, mutual
trust, communication and sharing relevant and
confidential information are essential for the
development and maintenance of the partnership.
Partner organizations are interdependent on each
other, sharing the risks and rewards of the relation-
ship. The maintenance of a relationship requires
conflict-resolution techniques (Mohr & Spekman,
1994, 151-152). Partnerships also require invest-
ments on relationship-specific assets (Dyer &
Singh, 1998, 662). Partnering is a process where
a customer firm and supplier form strong and also
broad social, economic, service and technical ties
over time (Anderson & Narus, 1999).
In addition, to survive in the fast-changing
environment, the case organization as “an adap-
tive organization” (Radjou, 2002) would have to
be more like a shifting “constellation” (Mintzberg
& Huy, 2003) that has linkages with its decentral-
ized and semi-autonomous organizational units.
Howell (2008) also stresses the importance of
adaptive organization and dynamic capabilities
in R&D. Capability development in R&D seems
to be an important prerequisite for converting
external knowledge into internal innovation.
Previous studies of the resource-based view of
the firm (RBV) claim that the firm’s competitive
advantage lies in its capabilities and the efficient
usage of them (See e.g. Penrose, 1959; Rumelt,
1974; Wernerfelt, 1984; Zollo & Winter, 2002). In
addition, the dynamic capabilities view suggests
that organizations acquire new knowledge, skills,
expertise, and capabilities through organizational
learning (Teece et al., 1997). In the existing litera-
ture, there is limited understanding of the dynamics
of the emergence of capabilities in R&D networks,
particularly with regard to the role of actors in the
development process (Alajoutsijärvi et al., 1999;
Håkansson & Lundgren, 1995; Håkansson &
Waluszewski, 2002; Lundgren, 1991). This study
therefore aims to contribute to such discourse
by studying the evolution of a capabilities and
knowledge through joint collaboration projects
from the viewpoint of the two major actors.
The purpose of this study is to investigate the
joint effort of a multinational company (MNC)
and another player of the ICT-sector and how they
jointly developed their organizational intellectual
capital (IC) and their dynamic capabilities in R&D
collaborative networks. The starting premise is
that the characteristics of the task that organiza-
tions try to accomplish through forming a specific
collaborative network influence the organization’s
intellectual capital, the capabilities developed and
required. This chapter is based on a longitudinal
case study in the ICT-sector. The main argument
is that identifying the capabilities needed in a
business network context and supporting the
creation of new capabilities can have a positive
impact on the organization’s market share and
competitive success.
59

BACKGRounD
First, this section describes the research method
and research traditions. Secondly, it will describe
the market situation in the Information and Com-
munication Technology (ICT) –sector in Finland
from 1999 to 2003.
The case organizations in this study are Nokia
and Elisa. Nokia has been a multinational company
(MNC) and a major global player in telecom-
munications since 1990s. It has the largest cell
phone market share in the world in 2007. Elisa
is an international telecommunication company
and the most profitable one in Finland in 2006
to 2007. Elisa has subsidiaries in Germany and
global partners like Vodafone and Cisco. Elisa
Home Commerce Business (HCB) is based on
several emerging, breakthrough technologies (i.e.
xDSL, multimedia, mobile technology, Internet)
and its commercial development has been in-
fluenced both by the “e-hype” period of the late
1990’s and the bursting of this “bubble” early in
2000. The business services HCB provided, as
well as the technologies used, differ from those
used earlier in the case corporation, as HCB has
integrated several technologies, capabilities and
resources from a number of actors in different
industries to create services for consumers and
communities.
This particular study is based on the collabora-
tive network efforts between Nokia and Elisa in
the telecommunication in 1999-2003. This study
describes both the view of MNC and collaboration
with an MNC.
Research Approach
The research process in this study employs a
case study design, data collection and analyzing
techniques outlined by Yin (1994). It also uses
principles presented by Eisenhardt (1989) regard-
ing the process of building theoretical propositions
based on case study research and techniques used in
processual analysis presented by Van de Ven (1992,
60
Dynamic Capabilities in R&D-Networks
169) (see also Pettigrew, 1997; Van de Ven and
Poole, 1990). The reason for choosing a case study
approach lies in the in-depth knowledge needed
regarding the evolution of different collaborative
forms and their managerial processes. Information
about these phenomena requires good access to an
organization in order to be able to identify them
(Heide & John, 1995; Yin, 1994). This study is
temporally limited to the time period from 1999 to
2003. The time period is long enough to capture the
developmental process of a new business, Home
Commerce business (HCB) in Elisa and Home
Commerce related business in Nokia. The selection
of two corporations from the ICT -sector naturally
brings limitations concerning the generalization of
the results of the study. On the other hand, a case
study involving two corporations with excellent
data access makes it possible to understand the
phenomenon under study more profoundly. Part of
this study, such as the interviews and internal docu-
ments, are based on a qualitative longitudinal study
from 1990 to 2003 undertaken in the ICT-sector in
Finland (Juntunen, 2005). The real-time data collec-
tion for the study was mainly completed from 1999
to2003. Personal interviews were very important
source of information. Around thirty interviews or
cooperative meetings were conducted with regard
to the new business during 1999 to 2004. They are
detailed in the reference list of this chapter. More
in-depth questions were emailed to key personnel
at HCB to obtain a deeper understanding of the
issue in question (cf. Miles and Huberman, 1994;
Yin, 1994, 84). In addition, the researcher had
the opportunity to observe the business creation
process and participate in R&D-projects and the
strategy planning process as an employee of the
Elisa Corporation from 1999 to 2001. Secondary
material was gathered from the case corporation.
The data collected consisted of articles, project
documents, and emails between members of the
projects, memorandums of understanding, strate-
gies, business plans and annual reports from the
years 1990 to 2003. Documents were arranged in
chronological order and by projects.
Dynamic Capabilities in R&D-Networks
Review of Research Traditions
This study aims to contribute to the development
of the emerging theory of network management
by integrating concepts from the Industrial Net-
work Theory (IMP)1, the resource-based view
of the firm (RBV), the dynamic capabilities
-view, knowledge management and especially its
inter-organizational learning perspective. These
research traditions have embarked upon the chal-
lenging issues of the competitive positioning of
a firm (see e.g. Porter, 1980, 1985), how a firm
can acquire competitive advantage and core
competences (see e.g. Prahalad & Hamel, 1990,
1994; Hamel & Heene, 1995), and how value is
created with the help of external resources (see
e.g. Amit & Zott, 2002; D’Aveni, 1994; Eisenhardt
& Martin, 2000; Teece et al., 1997).
The concepts of organizational learning
(Senge, 1990) and knowledge management (see
e.g. Allee, 1997; Boisot, 1998; Choo, 1998;
Davenport & Prusak, 1998; Leonard-Barton,
1995; Nonaka & Takeuchi, 1995; Sveiby, 1997;
Sanchez and Heene, 1997) are also utilized since
inter-organizational relationships create possibili-
ties for knowledge acquisition, combination and
exploitation. Knowledge Management and its
inter-organizational learning perspective in par-
ticular are used to analyze the learning process in
the organization and learning through experiences
in a collaborative form that the case organizations
participate in or construct.
RBV and Dynamic Capabilities views are
used in this study to better understand what kind
of capabilities organizations attempt to create
and what resources they utilize when construct-
ing business networks. IMP in conjunction with
the RBV are selected to analyze the development
and acquisition of resources within the focal ac-
tor and through relationships in a business net.
Resources refer to the resource pool that an actor
can coordinate through mobilizing actors in a
business network.
Many practitioners are of the opinion that
strategy depends on learning, and that learning
depends on capabilities (Prahald & Hamel, 1990;
Mintzberg et al., 1998, 213). Unique company
resources and capabilities are therefore seen as
a primary basis of profitability and the basis
for formulating its longer-term competitive
advantage. This organizational emphasis on
restructuring, reengineering, outsourcing and
forming alliances to build unique capabilities
became known as the Resource-Based View
(RBV) (Penrose, 1959; Rumelt, 1974; Zollo &
Winter, 2002). The RBV perspective suggests that
a firm is a collection of heterogeneous resources
(Wernerfelt, 1984). It suggests that a company’s
performance is related to differences in its re-
sources. Resources that are not easy to imitate
form the basis for competitive advantages (Amit
& Schoemaker, 1993). The concept of dynamic
capabilities became an addition to the RBV –ap-
proach in the middle to late 1990’s. The RBV-
approach and its knowledge-based extension of
inter-organizational collaborations conceptualize
the firm as a collection of resources, of which
knowledge and core capabilities are a critical
issue in achieving, maintaining and renewing
competitive advantage. Companies differ in how
they can control resources that are necessary for
implementing strategies. The core behavioral as-
sumption is that companies are able to learn by
acquiring, assimilating, sharing and dissimilating
knowledge within the organization and between
organizations. RBV sees the knowledge, capa-
bilities, organizational culture and management
as sources of competitiveness. The Resource-
Based argument of alliance formation suggests
that firms use alliances to establish the optimal
resource configuration that maximizes the value
of their resources is (Das & Teng, 1998). Us-
ing different types of cooperative forms allows
companies to develop new value creation and a
resource base that a single company could not
have formed (Blomqvist, 2002).
61

As Nonaka and Takeuchi (1995) said: “When
markets shift, technologies proliferate, competi-
tors multiply, and products come obsolete almost
in overnight, successful are those companies that
consistently create new knowledge, disseminate it
widely throughout the organization, and quickly
embody it in new technologies and products”.
These activities define the “knowledge-creating”
company. The knowledge management approach
emphasizes knowledge as a key competitive asset
(Nonaka & Takeuchi, 1995; Nonaka & Teece,
2001). Knowledge management is seen as a way
to enhance performance in many organizations.
Knowledge sharing in a network and between
organizations is a critical factor in terms of its
relative competitiveness (Håkansson, 1989).
Knowledge sharing refers not only to codified
information, such as product specifications, but
also to beliefs and experiences. Seen from this
perspective, knowledge creation, management
and sharing are a question of mastering the
renewal and change in all the activities within
an organization and within a network of orga-
nizations. Information, on the other hand, can
be defined as easily codifiable knowledge that
can be shared between network actors (Kogut
& Zander, 1997, 386). Different forms of inter-
organizational relationships generate possibilities
for collaboration, learning, knowledge transfer,
knowledge sharing, and knowledge exploitation
(Amit & Zott, 2001; Nonaka & Takeuchi, 1995).
Organizational Learning within the scope of this
research can be defined as the organization’s abil-
ity to gain understanding from experience through
experimentation, observation and analysis (Senge,
1990; Argyris,1993; Kim, 1993).
The Industrial Network or “markets-as-
networks” -approach pursued by the Industrial
Marketing and Purchasing Group (IMP) view
industrial markets as networks of inter-firm re-
lationships. It stresses the importance of business
relationships as a coordination mechanism on a
balance with markets and hierarchies, and their
role in supporting learning and innovation in
62
Dynamic Capabilities in R&D-Networks
industrial systems (Håkansson, 1989; Lundgren,
1991). Networks represent a complex system
in which different interdependencies between
actors are characterized by both competition
and cooperation, continuously constituting and
reconstituting business fields (Alajoutsijärvi
et al., 1999; Håkansson & Waluszewski, 2002;
Mattson, 1985). Moreover, development of new
technical innovations and solutions require conti-
nuity in relationships. (See e.g. Håkansson, 1989;
Waluszewski 1990; Lundgren, 1991)
The RBV and IMP –approaches both view
a company as an actor in a web of relationships
which influence the firm’s conduct, survival and
success. While the RBV –approach focuses on
the constraints that a dependence on exchange
partners poses and emphasizes the firms’ pur-
suit for independency by increasing the firm’s
resource base, and thus, productivity (Rumelt,
1984; Wernerfelt, 1984), IMP –theory focuses
on accumulating benefits and effectiveness via
a network of relationships (Håkansson, 1989).
The dynamic capability -view adds the dimension
of seizing business opportunity via the creation
of new capabilities dynamically suitable for the
changing situation within both a network and a
business context.
operational Environment
and the Development of The
iCT-sector in Finland
The late 1990s and early 2000s also marked a
fundamental change in Finland in terms of the
structure of the whole ICT-sector as well as in the
international position of Finland as it became one
of the world’s high-technology driven countries
because of Nokia giving it a competitive edge in
new digital services. Finland became the fast-
est developing and most specialized country in
communications equipment exports in the world
outrunning e.g. Japan, (Paija, 2001, 3), with the
extraordinary expansion of this ICT-sector mainly
due to the case organization, Nokia. Nokia calls
Dynamic Capabilities in R&D-Networks
the years of 1992 to1999 the years of mobile revo-
lution. During this period, the CEO Jorma Ollila
put Nokia at the head of the mobile telephone
industry’s global boom – and made it the world
leader before the end of the decade. (www.Nokia.
com, 2008)
The early years of the 21st century were
concerned with the world economy as well as
uncertainties in regard of the demand for telecom-
munication services. Starting in the late 1990s,
the shift to Internet services in developed and in-
novative telecommunications and mobile markets
caused a radical restructuring of the traditional
telecommunications industry from that of the
early 1990s (Steinbock, 2001, 136). New enabling
technologies generated new business models as
the Internet’s open standards and the fast pace of
technology- and service innovations ruined ver-
tical integrations in the traditional industry. The
emergent new industry structure was horizontally
layered and dominated by actors with horizontal
business models (Steinbock, 2001, 136). A major
change in the structure of the telecommunica-
tions industry was a division to the three-layer
model of central business operations: the service
operator, the network operator and the delivery
channels. The change resulted in both increased
competition and regulatory actions. This change
in industry structure reflected strategic actions
made by players in the ICT-sector. It affected the
business models and the differential value of dif-
ferent technologies based on the assumptions of
what should be the next ‘hot selling’ cell phone
or service in future years.
According to Elisa’s CEO Matti Mattheiszen
(2002): “Buying companies is the easy part, and
it’s equally easy to make big promises about the
synergies we’re after. In reality, making different
corporate cultures compatible or obtaining syner-
gies is a great challenge.” The future competitive
advantage of a firm can be found in the economic
efficiency of its operations, in its innovativeness
and its customer service -capabilities. More
generally, a firm should innovate to survive
under competitive pressure (Porter, 1990) and
competitive pressure may give more incentives
to the stakeholders, managers and employers of
the firm to increase their efforts and improve
efficiency.
Knowledge transfer encompassed a broad
range of interactive activities that included on-
going formal, informal personal interactions and
cooperative education both with partners and
within Elisa. In the different types of collaborative
forms, Elisa employed knowledge transfer and
research support relationships to create new capa-
bilities and acquire information of new emergent
technologies. It was not yet decided what would
be future core and non-core technological areas in
Elisa. The focus was more on problem solving in
incumbent core technological areas (i.e. fixed-line
network) through technology transfer. Cooperative
research relationships were used both in the core
technology area and in new emerging technology
areas. Seeking knowledge transfer and creation
through vertical and horizontal networking was
one way in which the case organization and Elisa
collaborated and tried to overcome the challenges
of R&D and the rapidly changing competitive
and technology environment. Nokia, on the other
hand, focused on its core business areas, namely,
cell phone services and networks.
Figure 1 shows the major drivers of change in
1990s and how they affected the organizations by
forcing the companies to react in different ways
to the new challenges in the competitive environ-
ment. The major drivers of change were liberaliza-
tion, deregulation in Europe, regulator’s actions
in different countries, globalization, increasing
competition, new entrants in telecommunication
markets, internationalization and new emerging
technologies. The competitive responses formu-
lated by the case organizations in this evolving
market situation were changes in management,
corporate strategy, business models, organiza-
tional structures, products and services.
The burst of the “IT-bubble” and the end of
“e-hype” in 2000 was caused by several factors
63

Figure 1. Summary of the major drivers of change and organization’s competitive responses
including a lack of insight into how deregulation
of the telecommunication industry in Europe in
1998, commercialization of the Internet and other
technologies like broadband and multimedia com-
bined with mobility would change the business
environment. In addition, it was hard to estimate
the demand for new services and products based
on these new enabling technologies. The fast pace
of technological innovations and the complexity
of new technologies, products and “multi-actor
– multi-technology” -markets made it difficult
to forecast and understand the implications of
networks of organizations and the integration of
these emerging technologies. Customers were
not accepting products and services based on
new technologies as fast as the markets, investors
and firms expected. (Simula, 11/2003).The years
2001 to 2003, were characterized by the burst of
64
Dynamic Capabilities in R&D-Networks
the “IT-bubble” and declining profits in fixed-line
and mobile business. Moreover, Elisa experienced
changes both in organizational structure and in
senior management during these years. The new
CEO, Veli-Matti Mattila, commenced his position
in July 2003. He changed both Elisa’s corporate
and organizational strategy in 2003 to increase
business profitability and efficiency. He turned
declining profits into success and Elisa became
the most profitable telecommunication provider
in Finland in 2006-2007.
In Nokia, the change of CEO from Jorma Ol-
lila to Olli-Pekka Kallasvuo occurred in 2006.
Nokia’s story continued from 2002 to 2008 with
3G, mobile multiplayer gaming and multimedia
devices. Nokia was recognized as fifth most
valued brand in the world in 2007. (www.nokia.
com, 2008)
Dynamic Capabilities in R&D-Networks
The silicon Hill R&D networks
Elisa initiated the Silicon Hill 1999 and Silicon Hill
2000 R&D-networks (Jäntere, 2000) (see Figure
2). These were followed by the Megahouse and
Megahome development-project nets targeted at
further development of technological architecture,
basic services, and new home commerce services
(Masala, 2000a, 2000b, 2000c, 2000d; Masala &
Pesonen, 2000). Home Commerce, in this instance,
refers to a set of Internet-based services targeted
toward consumers and accessible from home using
various terminals. Internationally, the concepts
of “Future Home”, “Smart Home”, “Intelligent
Home”, “Digital Home”, “Networking Home”,
“Smart Environments”, “Internet Home”, “Au-
tomated Home” and “Smart Housing” are used
for platforms and services within this business
(Masala, 2003). This study uses the terms “Future
Home” and “Smart Home” in the same context.
These concepts refer to “a house or an apartment
with a cabled or wireless intelligent network used
to control signals for building automation or to
transmit multimedia signals”. The concept of
building automation denotes “home automation,
residential system technology, residential wiring
technology. It incorporates all automating mea-
sures employed within buildings (including leased
housing and private homes). Building automation
makes it possible to control and regulate techni-
cal systems to ensure efficiency, primary energy
savings, productivity and comfort.” 2 Globally,
many platform and component providers were
interested in home automation and monitoring
services, with global actors like Nokia, Hewlett
Packard3, Compaq, Philips, Siemens and Cisco4
actively researching possibilities in this business
area since the mid 1990s. Moreover, not only
were manufacturers and technology providers
interested in this business area, universities and
research centers5 were also investing in this area,
both in Europe6 and in the USA7, where coopera-
tive projects between universities are common. For
example, MIT was investing heavily in intelligent
home environments. In the USA, annual confer-
ences have been organized around this theme
since 19988. (Masala, 2003)
The Silicon Hill R&D-networks were sequen-
tial and cooperative associations between the high-
tech companies Nokia, Hewlett Packard, ICL,
Elisa and educational organization like Amiedu.
To promote international R&D cooperation
Tekes (The National Technology Agency) funded
this collaborative research and thus facilitated
researcher mobility. Tekes provided a gateway
to find the right partners in specific technol-
ogy collaboration. The training and personal
development services of Amiedu offered a wide
range of opportunities for enhancing the skills
of individuals and teams in the R&D-networks.
ICL (currently Fujitsu Services Ltd) assisted in
software development.
The purpose of these Silicon Hill R&D-
networks was to define the capabilities needed
and the technology design required to build an
open-interface future home -service platform in
which selected partners could build a complete
user-interface for home automation services and
home networking. Also, various technology ap-
plications and services were evaluated in order to
find spearhead solutions related to this specific
new business and technology field including home
automation, security and social functionalities,
home electronics and appliances, entertainment
and community services, remote work and edu-
cational services (Hietanen, 2000a).
The key objectives common to the two Silicon
Hill alliances during 1999 to 2000 included the
utilization and development of core capabilities
in both network and communication technologies,
and the creation of a functional technological
development, demonstration and piloting environ-
ment for companies in the area of Pitäjänmäki in
Helsinki (Hölttä, 2000). The case corporations
and other network members had realized that
the competitive advantage of companies relied
on its managerial and organizational processes,
supported by dynamic capabilities. These reflect
65

Figure 2. The actors of the two sequential Silicon Hill – alliances during 1999-2000
company’s ability to integrate, build, reconfigure
and renew internal and external competences to
address changes in its competitive environment.
There was no specific leader in the Silicon Hill
R&D-networks. Each member had their own
specific goals to reach in terms of their own sub-
projects alongside the common objectives of the
R&D-cooperation.
One particular goal in these R&D-networks
was to fine-tune product concepts. These ideas
related to educational platforms in the Internet,
self-learning in the Internet, home automation, data
security issues, and VOIP-technology9. Elisa’s
project group also tried to establish a best practice
method, with which Elisa could manage either
several concurrent R&D processes in different
business units or concurrent R&D projects, con-
cerning multiple products and services, within the
case corporation (Hölttä 2000). Elisa’s and Nokia’s
aims in the Silicon Hill R&D cooperation were
not only related to the learning and transferal of
technology but also to the integration of multiple
technologies and platforms. The collaborating
R&D-partners considered that technology in
itself does not deliver innovations. Consumer
value of the new technologies was considered
important. Convenience was considered as one
66
Dynamic Capabilities in R&D-Networks
of the major drivers of change. As part of these
R&D-projects, several technologies were tested,
such as data security, in particular PKI10, VOIP-
technology, Gigabit-Ethernet network technology,
and e-learning environments which led to the
establishment of Efodi in 2000. Efodi was “the
e-learning space” and Elisa’s e-learning platform
(Hölttä, 1999).
During the year 2000, the focus was on coop-
eration with the construction companies who were
building new houses. Silicon Hill alliances and
Megahouse (Masala, 2003) concentrated mostly
on home networking and evaluating service con-
cepts. In Elisa, the general research focus gradu-
ally shifted towards different payment and billing
methods in the Internet and mobile networks.
Megahouse was piloted at the “House Fair” in
the city of Tuusula in the Villa 2000 –House in
2000. The new service platform in the Megahouse
–project was named as Kotiportti™ in the “House
Fair”. It was both a home portal and access for
different services based on broadband, multimedia
and Internet.
In Nokia, the new Home Commerce business
area was constructed offering platform and net-
work services for partners like Elisa. Also, Nokia
established a viable network of sub providers of
Dynamic Capabilities in R&D-Networks
different technological components all over the
world during 1999 to 2000. The common corporate
and documentation language was English even if
the sub providers were from different cultures and
had different native languages.
Cooperation partners such as Elisa saw Nokia
delivering on its promise to lead the development
of the growing home communications market
based on its strong position in mobile telephony,
IP technologies and digital broadcasting. Nokia’s
strength across the full range of digital technolo-
gies enabled Nokia to develop unrivalled expertise
in all major parts of the distribution chain for home
communications (broadband access, fast internet
access solutions, wireless local networks, next
generation media terminals and mobile display
devices). This gave Nokia a unique starting point
in the home communications market. Heikki
Koskinen, Vice President and General Manager,
Nokia Home Communications, commented in
2000 (Nokia’s press release, 2000): “Nokia Home
Communications is an important part of Nokia’s
Global IP Mobility strategy, given that the home is
increasingly integrated with the office and personal
environments. Nokia will be at the forefront of
developing the necessary gateways and terminals
to bring high-quality multimedia services into
the home. This complements Nokia’s Global IP
Mobility Strategy and is in line with our vision
of enabling people to communicate smoothly,
independently of time or place.”
Elisa and Nokia considered themselves as
coopetitive actors because they developed Home
Commerce or Future Home related solutions and
platforms together. Cooperative actors included
the television companies and actors from the con-
struction and electrical industries. Non-strategic
actors were those who produced a specific part
or a single software component according to
specification under the tight control of the case
companies. Non-strategic and independent ac-
tors were those who delivered products such as
servers or databases. They were not critical and
could be replaced. Based on previous experience,
gained from previous collaborative efforts the case
companies knew that some parties would join the
network for their own benefit, to gather enough
experience and information to come up with a
competitive or substituting solution. Therefore,
partner selection was an essential determinant
of success and knowledge gathering in this new
technology business. The impact of the partners
of the Silicon Hill alliances assisted the innova-
tions in technologies and processes. The partners
developed ideas for new IP mobility strategies
and platforms.
In 2002 Nokia decided to end its Home Com-
merce business area. The reasons were the burst
of the “IT-bubble”, fear of recession, and a lower
return of interest (ROI) from the Home Commerce
business than was expected, and also, the change
of business strategies and need for concentration
in its core businesses to gain global success. Nokia
used the capabilities, process and technology in-
novations in developing its core business areas:
mobile phones and networks. From 2002 forward
Nokia concentrated on 3G, mobile multiplayer
gaming, and multimedia devices. The IP mobil-
ity strategy was still part of Nokia’s strategies
even if the Home Commerce as a business area
was terminated. Nokia gained from the col-
laboration by developing its contractor network
and capabilities in different technologies. Nokia
used its technology and process innovations in its
following partnerships in platform development.
Nokia was still interested in home commerce as
part of its core business and mobility. Nokia saw
that the future development trends would require
a different operating system for a new breed of
smart cell phones and palm-top computers with
Internet access. It wanted to ensure its position
in future palm-top computers and smart cell
phones by collaborating with different technology
partners. Moreover, a lot of the home commerce
conducted in web today will move to television
quickly. The MNCs have to stay alert and fol-
low the trends in home commerce and mobile
markets to keep their position. The convergence
67

of mobile, information technology and television
will continue to affect the key players and their
market share in the future.
Amiedu assisted Nokia and Elisa in the e-
learning challenges of global enterprises. In year
2000, Nokia had 60 e-learning solutions and 30
000 users. Today, Nokia offers B2B, B2C and
B2E e-learning solutions across its supply chains.
The solutions have a common strategy, platform
and processes.
The resource transfer also occurred between
the partner companies in Silicon Hill alliances
starting in 2000. Some of the key employees
switched from one partner company to another.
The employees used the previous contacts in R&D
networks when they searched for new employers.
There were also formal joint alliances formed
between some of the companies and thus allowed
the resource transfer.
In 2000, ICL formed a joint venture called
Nice-business Solutions Finland Ltd with Nokia
to support Nokia Information Management’s
e-business strategy (Business Wire February 21
2000). Tarmo Ruosteenoja, Vice President of
Nokia Information Management, said in March,
2000: “Nokia is a world leader in its industry.
The mission of Nice-business Solutions Finland
Ltd is to implement e-business and customer
relationship management solutions and services
that support Nokia’s strategy. The arrangement
also ensures that in addition to our own growing
resources, we have the best expertise in the field
at our service.” Moreover, Esa Tihila, Director of
ICL’s global e-business and the Chairman of the
Board of Directors of Nice-business Solutions
Finland said in March 2000: “A joint venture with
Nokia is a significant expansion to the existing
co-operation between our two companies. ICL is
Europe’s leader in e-business services and for us
it is important to co-operate with market leaders
in long term partnerships.“
Nokia’s subcontractors continued to work
together with HCB and they made bilateral
contracts. Many subcontractors were SMEs of
68
Dynamic Capabilities in R&D-Networks
niche skills or products. The advantages of the
previous collaboration with MNCs allowed the
SMEs to gain access to new potential customers
and collaborators. The MNE-networking therefore
allowed the SMEs to broaden their customer base
and services. Moreover, the platforms and applica-
tions developed during the collaboration assisted
Elisa to gain its competitive advantage in home
commerce and broadband business in Finland.
Managerial implications
One important aspect of the managerial implica-
tions was the description of the elements leading
to the successful formation of a new business and
the capabilities needed, thus creating a competi-
tive advantage in the Home Commerce business
field. Firstly, the ability to ascertain holistic or
architectural technological and business knowl-
edge of the complex emerging technologies
provided an opportunity to control the planning
and innovation of new services and products, and
the capabilities created with close partnerships. If
other actors delivered only parts of services, such
as components or single products, and the case
companies had knowledge of the whole infra-
structure, it was difficult for anyone else to take
control, maintain the infrastructure and coordinate
other actors of the cooperation network even in
the same technology field. Business knowledge
was needed in managing the upstream processes
and in coordinating the data flow in technological
integration, particularly in new product develop-
ment and logistical processes.
Another result was the observation that, being
a pioneering actor, like Elisa and Nokia in this
case, the actor had to develop specific interorga-
nizational relationship and network management
capabilities in order to be able to advance from
the development of basic technologies to the com-
mercialization and marketing of ICT products and
home commerce services.
When considering the intellectual capital (IC)
and capability development, managerial capabilities
Dynamic Capabilities in R&D-Networks
were needed to organize relationships and orches-
trate actors in the R&D-networks. More traditional
managerial capabilities included personnel manage-
ment (HRM), business process planning, budgeting
and strategy development. Managerial capabilities
needed and developed can be divided into two
groups: The network- level managerial capabilities
included the mobilization of actors within a business
net, the control of information flow between net
actors, the contract management of actors in varied
roles and of difference importance within a net,
collective strategy planning and the coordination of
internal and external resources; The business level
managerial capabilities included personnel man-
agement (HRM), internal resource management,
internal cooperation, business strategy planning,
product strategy planning and budgeting. Training,
informing of best practice cases and meetings with
sub contractors were seen as an essential part of
the successful supply chain management in the
case organizations.
The emergence of a new business in the ICT-
sector seems to be a combination of the evolution
of technological and market factors, which are not
controllable by any one actor, and of the intentional
strategy of developing collaborative forms like
partnerships and R&D-networks.
Dynamic organizational capabilities created
in the Silicon Hill alliances involved both new
learning and the renewal of existing capabilities.
This study suggests that case companies acquired
knowledge in the formation of new business and
product ideas by gathering information from vari-
ous internal and external sources. It mobilized
partners to create new integrated services for
homes and communities. The vision of a new
business and innovations were important factors
in the development path of both the companies.
Visioning relates to two different types of learn-
ing: exploitation and exploration (March, 1991).
Exploitative learning meant that the case com-
panies followed the activities of competitors as
well as general developments in technology. The
broadening contact network, new capabilities,
knowledge of technology and business assisted
in the creation of a partner portfolio inclusive of
both potential partners and existing partners. The
growing partner network demonstrated that knowl-
edge and abilities in the acquisition of partners
were adequate. Explorative learning (cf. March,
1991) meant that case companies were capable of
(1) identifying new business opportunities of the
emerging technologies faster than the competitors,
(2) exploiting the collaboration R&D-networks
more efficiently than the competitors, and (3)
choosing the right partners to reach their strategic
and business goals.
These findings have important theoretical and
methodological implications. First, they support
the Industrial Network Approach (see Håkans-
son et al. 2004) and the Resource Based View in
emphasizing the key role of the combining the
heterogeneous resources controlled by various
actors in order to be able to create new techno-
logical and business solutions.
ConClusion
New business creation is not an independent, iso-
lated process but a collective process that requires
interaction and cooperation with other actors. It
involves the establishment and maintenance of a
network of relationships with other organizations
including suppliers, competitors and customers
(Håkansson & Snehota, 1995). In the case orga-
nizations, internal resources and collaboration in
R&D-networks with other companies were seen
to be critical for the creation of future competitive
advantage. More and more, inter-organizational
relationships are important sources for acquir-
ing external knowledge since they allow for the
acquisition of supplementary and complementary
capabilities held by their alliance partners while
facilitating the flow of knowledge and information
between different parties.
However, the major challenge for both the
national and global ICT-companies is to ensure
69

the sustainable growth and the development of
the ICT-sector and ICT-related capabilities and
skills. This sustainable development will not only
be possible through technological development
through the development of national and inter-
national policies. R&D -networks can offer new
sources of innovations and knowledge, and thus,
assist in developing the skills and capabilities
needed in national ICT-development and assure
the competitive advantage locally and globally.
The report published by The Foreign Investment
Advisory Service (FIAS) in June 2007 claimed
that while companies’ supply chain monitoring is
important, the ICT industry should also collabo-
rate with the government and non-governmental
organizations to improve capability-building and
training of their supplier to ensure sustainable de-
velopment and to improve environmental, social
and labor conditions.
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EnDnoTEs
1
The IMP = Industrial Marketing and Pur-
chasing group has researched and created
the so-called Industrial Network Approach
(see e.g. Håkansson & Snehota, 1995, Hå-
kansson, 1987)
2
http://www.inhaus-duisburg.de/en/meilen-
steine/glossar.htm
3
h18000.www1.hp.com/corporate/1995ar/
connect.html
4
www.cisco.com/warp/public/3/uk/ihome
5
see e.g. http://www.designing-ubicomp.
com/Arbeitsdateien/1_environments.html
6
ee e.g. http://www.automatedhome.co.uk/
links.php3
7
see e.g. http://www.smarthomeusa.com/info/
default.asp?category=about&infofile=about
8
see http://www.parksassociates.com/events/
forum98/
9
VOIP = Voice over IP, a VoIP-device and -ser-
vice to send and to receive IP-voice. Internet
telephone refers to communication services
– voice, facsimile, and/or voice-messaging
applications – that are transported via the
Internet, rather than the public switched
telephone network (PSTN). The basic steps
involved in originating an Internet telephone
call are conversion of the analog voice signal
to digital format and compression/transla-
tion of the signal into Internet protocol (IP)
packets for transmission over the Internet.
The process is reversed at the receiving end.
(www.iec.org.online/tutorials/int_tele)
10
PKI = Public Key Infrastructure; a security
service which is divided into two keys: public
and secret with which the data security can
be guaranteed in transfer.
73
Section 2
Strategy
 75

Chapter 5
Intellectual Capital
Measurement and Reporting:
Issues and Challenges for
Multinational Organizations
Suresh Cuganesan
Swinburne University of Technology, Australia

Richard Petty
Macquarie University, Australia

ABsTRACT
Multinational organizations operate across a variety of complex competitive environments. Achieving
the right balance of global alignment and local flexibility is central to competitive success for these or-
ganizations. Viewed from an intellectual capital perspective, multinational organizations need to: design
and execute appropriate structures and systems (structural capital); engage and align its international
workforce (human capital); and, generate favourable relationships across the multitude of stakeholders
it interacts with globally (relational capital). But in pursuing these goals, a number of issues and chal-
lenges are faced: How to make sense of intellectual capital investment decisions? How are they to com-
municate intellectual capital priorities throughout the multinational business? And, with what tools are
they to measure and monitor investments and initiatives such that refinements and corrective action can
be made? In dealing with these issues, intellectual capital measurement and reporting practices can help.
This chapter presents the conceptual framework underpinning intellectual capital, discusses limitations
with traditional financial reporting models, outlines the benefits of intellectual measurement, and reports
and presents research on the perspective of finance professionals evaluating global companies.

BACKGRounD the right balance of global alignment and local

Multinational organizations operate across a variety
of complex competitive environments. Achieving
DOI: 10.4018/978-1-60566-679-2.ch005
flexibility is central to competitive success for
these organizations. In operating across a multitude
of varying institutional, regulatory, cultural and
business contexts, multinational organizations face

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.

a number of challenges. These challenges have
been identified as including:
• Operating a business model that services
different international markets with diverse
needs, with a distributed organization that
has no ‘home country’ bias and which inte-
grates various cultures (Fallah and Lechler,
2008).
• Managing different language, culture, poli-
tics, government regulations, management
style and labour skills (Sheu et al., 2004).
• Balancing tensions such as global versus
local and face-to-face versus electronical-
ly-mediated communication (von Zedwitz
et al, 2004).
Fink and Holden (2005) observe the impor-
tance of global knowledge transfers as a means
of competition for international organizations
and note the following difficulties faced in ef-
fecting these:
• International knowledge transfer sys-
tems typically meet resistance by local
managers.
• Organizational personnel in remote loca-
tions do not participate in global knowl-
edge management transfers unless central
management show respect and apprecia-
tion for local customs and cultures.
• The need for local participants to unlearn
practices and skills that are not consistent
with the common set of practices that the
organization wishes to adopt.
Responding to such challenges requires
investments. Investment is needed to create ap-
propriate organizational structures and systems
that ensure the recognition of important local
business unit differences and their alignment to
a global firm profile. Firms also need to invest
in developing an engaged workforce that is geo-
graphically distributed and which operates with
76
Intellectual Capital Measurement and Reporting
diverse norms and values. Finally, international
organizations need to expend time and effort in
building relationships with local stakeholders
and authorities. Global organizations are thus
confronted by difficult questions: How to make
sense of these investments decisions? How can
they communicate these priorities throughout the
multinational business? And, with what tools are
they to measure and monitor investments and
initiatives such that refinements and corrective
action should be made?
This chapter argues that the management
challenges and investment decisions faced by
international organizations as outlined above
can be usefully conceptualised through Intel-
lectual Capital (IC) frameworks. Indeed, IC and
intangible assets frameworks and concepts have
already been used to investigate the factors and
resources that influence internationalisation of
professional services firms, examining relational
and human capital in particular (Hitt et al., 2006).
The use of corporate citizenship by international
organizations as a means of overcoming national
barriers and outperforming local competitors has
also been studied using an IC calculus (Gardberg
and Fombrun, 2006).
Furthermore, this chapter contends that inter-
national organizations should consider measure-
ment and reporting frameworks that are different
from traditional financial reporting. Traditional
financial reporting systems often provide an
incomplete picture of a firm’s IC. The remainder
of this chapter discusses the benefits that IC mea-
surement and reporting can offer, and the role and
challenges that organizations face in implementing
such practices. Throughout the chapter, the theory
that underpins IC measurement and reporting is
discussed, and research evidence and examples
from practice are presented and analysed.
The chapter’s objectives are as follows:
1. To present research on the perspective of
finance professionals evaluating global
companies.
Intellectual Capital Measurement and Reporting
2. To outline the benefits of IC measurement
and reporting.
3. To discuss limitations with traditional finan-
cial reporting models.
4. To present the conceptual framework un-
derpinning IC.
The chapter’s objectives are addressed in the
ensuing sections.
PRoBlEMs WiTH THE
TRADiTionAl FinAnCiAl
REPoRTinG MoDEl
Financial accounting reports have traditionally
been prepared based on the historical cost principle
whereby transactions are recorded at the cost of the
transaction item(s) at the time the transaction took
place. This orthodoxy is very limiting, and leads to
a decrease over time in the value relevance to deci-
sion makers of the information presented to them.
Under current financial accounting practice, there
is some room for the revaluation of non-current
assets and for revisions to provisions and to items
such as inventory. However, beyond changes at the
periphery, the information conveyed by financial
accounting reports has remained essentially the
same for decades.
Whilst it was once the case that for a majority
of listed companies market capitalisation corre-
lated closely with tangible asset value, this is no
longer true (Lev, 1999). The value base of many
firms is now weighted heavily towards their IC.
Increasingly, it is IC that is the source of most of
a firm’s real value and competitive advantage in
the marketplace. For many IC rich companies the
disparity between market values and reported asset
values is so great as to render useless, in decision-
making and valuation terms, their annual financial
reports (Lev and Zarowin, 1999).
This widening gap between market and book
values has occurred as fixed assets become less im-
portant relative to IC in determining a company’s
success (Guthrie and Petty, 2000). Knowledge
organizations that leverage their IC to generate
super-normal performance in the marketplace
are progressively replacing traditional industrial
age ‘mass production’ technologies. The focus
on tangible assets has diminished commensurate
with an increased emphasis on information, ex-
pertise, technology and skills (that is, IC) within
knowledge based organizations. However, as
previously observed, accounting and reporting
practice, steeped in a tradition of almost 500 years,
remains largely unchanged (Barton, 1984).
This is problematic as accounting reports influ-
ence action. They communicate what is seen as vital
and important to an organization (Hines, 1988).
They drive decisions of an economic nature. Given
the importance of IC, a demand exists for it to be
recognised formally in company financial reports
(Guthrie, 1999; Sveiby, 1998; Wallman, 1995).
Those who maintain that objectivity is everything,
and who steadfastly refuse to accept that anything
other than ‘hard’ quantifiable data should appear
in accounting reports, will surely raise questions.
These might include: ‘how do we know that the
value imputed to these new intangibles is correct?
And, how can we have faith in the output of such
a subjective reporting system?
By way of response, consider whether the fig-
ures reported for the other firm assets are ‘correct’.
Are current financial reporting systems providing
information that is truly objective regarding a
firm’s position in the marketplace? Are the asset
values disclosed under a system of historical cost
representative of an objective reality? The answer
to both these questions is a resounding ‘no’. At
least by reporting some information for intangibles
we acknowledge their existence. This broadens
the scope for decision making by those relying
upon the annual statements, and it also means
that we can invest in improving what is already
in practice in some progressive organizations
(Guthrie et al, 1999).
The fact that traditional financial accounting
practice does not provide for the inclusion of non-
77

financial performance indicators in organizations
(Guthrie et al, 1999; IFAC, 1998; SMAC, 1998)
adversely impacts knowledge based organizations
that are looking to raise capital in the debt and/or
equity markets (Lev, 1999). ‘New’intangibles such
as staff competencies, customer relationships and
computer and administrative systems receive no
recognition in the traditional financial reporting
model. Interestingly, even traditional intangibles
like brand equity, patents and goodwill are reported
in the financial statements only when they meet
stringent recognition criteria. Otherwise they also
have been omitted from the financial statements
(IFAC, 1998; IASC, 1998).
The invisibility of IC has led to calls from regu-
lators and practitioners as well as academicians for
IC information to be disclosed in company annual
reports (Guthrie et al, 1999; Stewart, 1997; Wall-
man, 1995). These calls now have more substance
than ever before (Amir and Lev, 1996). Those in
favour of extending traditional reporting models
argue that we should not continue failing to report
those items of IC that represent the bulk of owner’s
equity for many firms. To do so is to deny a tenet
axiomatic to financial accounting - that is, it should
provide decision-useful information.
For external constituents and stakeholders
of organizations, it has been suggested that IC
be reported voluntarily by companies to better
address stakeholder information needs and to
compensate for the limitations of the traditional
accounting reporting environment (Wallman,
1995). Garcia-Ayuso (2003) also holds the view
that stakeholder interests will be better protected
by requiring that IC (as a subset of intangibles)
be reported by companies, and opines:
“…because of the larger information asymme-
tries in intangible intensive companies, there is
a greater risk that the opportunistic behaviour of
managers results in significant insider gains and
harmful earnings management that are obviously
harmful for stakeholders. As a consequence, the
78
Intellectual Capital Measurement and Reporting
risk of litigation is likely to be greater in those
firms unless transparency is enhanced and rel-
evant and reliable information on intangibles is
disclosed timely” (p.598).
Within organizations, the design of perfor-
mance measurement systems need to be configured
to capture an organization’s IC where these are
important in the creation and delivery of value.
Performance measurement systems facilitate
planning and control actions, coordination and
communication throughout the organization, and
the motivation and compensation of employees
(Meyer, 2002). If the mantra that ‘what gets mea-
sured gets managed’ holds, then organizations that
rely on IC to compete, but do not measure it, risk
failure. Hence, IC measurement systems offer
significant initiatives both in terms of manage-
ment activities and through reporting to external
stakeholders.
THE inTEllECTuAl CAPiTAl
ConCEPTuAl FRAMEWoRK
Definitions of intellectual Capital
• There are numerous definitions of ‘IC’.
One of the most workable definitions is
offered by the Organization for Economic
Co-operation and Development (OECD,
1999) which describes IC as the econom-
ic value of organizational (“structural”)
capital and human capital. More generally,
however, there is broad consensus that IC
comprises the elements of human capital,
structural capital and relational capital
components (Cuganesan, 2005).
Viewed from an IC perspective and revisiting
the challenges for multinational organizations
outlined earlier, these businesses need to:
Intellectual Capital Measurement and Reporting

• design and execute appropriate structures
and systems (structural capital);
• engage and align its international work-
force (human capital); and
• generate favourable relationships across
the multitude of stakeholders it interacts
with globally (relational capital).
Plenty of convincing arguments have been for-
warded in support of the need to better understand
IC via measurement and reporting (Brooking, 1996;
Petty and Guthrie, 2000c; SMAC, 1998; Sveiby,
1998; Danish Agency for Trade and Industry, 1998).
As discussed, these range from an intuitive under-
standing that it ‘matters’(Stewart, 1997) to evidence
that reporting IC has the potential to improve the
efficiency of both capital and labor markets (Bukh
et al, 1999; OECD, 1999). Few authors1, however,
have traced the sequence of events involved in
the development of IC. A historical perspective is
important in understanding the context in which
IC started appearing in company annual reports. A
general timeline of major IC practice and research
milestones appears in Table 1.
Table 1 communicates a general sense of the
extent to which theory and research has been

Table 1. Milestones: A chronological review of significant contributions to the identification, measure-

ment and reporting of IC

Period Progress
Early 1980s • Continuing general notion of intangible value (often generically, labeled as ‘goodwill’) held over from the earliest
days of doing business.
Mid 1980s • The ‘information age’ takes hold and the gap between book value and market value widens noticeably for many
companies.
Late 1980s • Early attempts by practitioner consultants to construct statements/accounts that measure IC (Sveiby, 1988).
Early 1990s • Initiatives by certain companies (e.g. Celemi and Skandia) to systematically measure and report on company
stocks of IC to external parties. In 1990, Skandia AFS appoints Leif Edvinsson ‘Director of IC’. This is the first time
that the role of managing IC is elevated to a position with formal status and given an air of corporate legitimacy.
• Kaplan and Norton introduce the concept of a Balanced Scorecard (1992). The Scorecard evolved around the
premise that ‘what you measure is what you get’.
Mid 1990s • Nonaka and Takeuchi (1995) present their highly influential work on ‘the knowledge creating company’. Although
the book concentrates on ‘knowledge’ the distinction between knowledge and IC is sufficiently fine as to make the
book relevant to those with a pure focus on IC.
• Celemi’s Tango simulation tool is launched in 1994. Tango is the first widely marketed product to enable executive
education on the importance of intangibles.
• Also in 1994, a supplement to Skandia’s annual report is produced which focuses on presenting an evaluation of
the company’s stock of IC. ‘Visualizing IC’ generates a great deal of interest from other companies seeking to fol-
low Skandia’s lead (Edvinsson and Sullivan, 1996).
• Another sensation is caused in 1995 when Celemi uses a ‘knowledge audit’ to offer a detailed assessment of the
state of its IC.
• Pioneers of the IC movement publish bestselling books on the topic (Kaplan and Norton, 1996; Edvinsson and
Malone, 1997; Sveiby 1997).
Late 1990s • IC becomes a popular topic with researchers and academic conferences, working papers, and other publications
find an increasingly diverse audience.
• In 1999, the OECD convenes an international symposium in Amsterdam on IC.
Years 2000- 2004 • The Meritum project (2001-2003) involves six European countries working together to deliver guidelines for the
development of an IC report.
• The ‘new’ Danish guidelines are developed (Danish Agency for Trade and Industry, 2003). The guidelines relied
upon input from 17 Danish organizations. The aim was to guide companies in the development of their own IC
statements.
Years 2005 • Other countries develop or consider develop guidelines for intellectual capital or extended performance reporting
onwards while leading global companies continue to produce IC statements.

79

guided by practice. This timeline is, of course, a
simplification of the richness in the development
process. It does however further an appreciation
of the distinction between first-stage and second-
stage IC projects.
Activity during and prior to the mid-1990s
largely belongs to the first stage. Much of the work
since may be characterised as second stage. First
stage work is primarily concerned with conscious-
ness raising and creating mass awareness of the
relevance of IC. A great deal of first stage work is
purely descriptive of what various organizations
have done. Publications falling under the first
stage umbrella tend to take the position that ‘IC
is something significant and should be measured
and reported’ without systematically relating
this general view to a specific external context.
The second stage in the development of IC as a
research field has seen attempts at theory building
and studies producing results with external validity
coming to the fore (Bozzolan et al, 2003; Ittner and
Larcker, 1998; Williams, 2001). Here, conceptual
refinement, methodology consolidation and em-
pirical research are seen as important elements of
scholarly development (Petty and Guthrie, 2000;
Marr et al., 2003; Andriessen, 2004).
A central concern for IC practitioners, consul-
tants and researchers continues to be the rendering
of the invisible as visible. For practitioners and
consultants, the aim of this endeavour is the for-
mulation of managerial intervention (Mouritsen
et al., 2002). For researchers, one focus has been
the understanding of the phenomenon of IC, and
how it operates to influence firm performance
(Marr et al., 2003). Over the last two decades
numerous frameworks and methods have been
developed to address these issues. The main types
are reviewed briefly below.
A recent review of IC measurement frame-
works by Sveiby (2007) identifies 34 different
alternatives. The first of these to evolve Sveiby
(2007) classifies as valuation frameworks, where
a monetary value of IC is sought to be determined.
In contrast, non-valuation frameworks, or score-
80
Intellectual Capital Measurement and Reporting
card methods, which seek to disclose measures
of IC evolved afterwards and have dominated the
literature since the new millennium (see Sveiby,
2007). One of the early scorecard methods, the
Balanced Scorecard (Kaplan and Norton, 1992),
has attained a dominant popularity in both the
academic and management circles (Neely et
al., 2004). But this and other related scorecard
methods have been critiqued as to their effective-
ness (Norreklit, 2000; 2003) and their theoretical
foundations (Marr and Schiuma, 2003).
The next evolution of frameworks and methods
seeking to capture representations of IC utilized
not only quantitative measures of IC, but also
included narrative (see Meritum Project, 2002;
Mouritsen et al., 2003). The additional narrative
was intended to locate the quantitative numbers
disclosed both as measures of IC and within a
broader network of value creation (Mouritsen
et al., 2002). These frameworks explicate the
reasons behind an organization’s management of
IC and offer some indication as to the structure
required to manage IC (Mouritsen et al., 2003). In
general, popular models used to construct reports
on IC include Kaplan and Norton’s Balanced
Scorecard (Kaplan and Norton, 1992), Skandia’s
Value Scheme (Edvinsson and Malone, 1997),
and Karl-Erik Sveiby’s (1997) Intangible Assets
Monitor, with the Danish Guidelines also being
used by organizations in that country to report
their IC. All of these aim to overcome problems
with traditional financial reporting.
THE RolE AnD BEnEFiTs
oF inTEllECTuAl CAPiTAl
MEAsuREMEnT sYsTEMs
This section explores why firms report IC. It identi-
fies incentives to report and considers why some
firms report while others do not. A discussion of
these issues sheds some light on why a growing
number of accountants are recommending that
traditional financial reporting models be extended
Intellectual Capital Measurement and Reporting
to permit and encourage the disclosure of IC in
company annual reports.
There are numerous incentives for firms to
voluntarily report on their IC. The overriding
incentive for most firms to report is to ‘render
the invisible visible’ (Cooper and Sherer, 1984)
in line with the axiom ‘what gets measured gets
managed’. This view is consistent with both stake-
holder theory and legitimacy theory. By making
IC a focal point both within and outside the firm,
the consciousness of the importance of IC as a
determinant of firm success is highlighted.
The incentives to report can be classified into
those relating to the external environment that
impacts the firm and those that relate to internal
firm activities. This can be described as (Guthrie
et al., 1999):
• External firm activities:
◦ Capital market effects
◦ Improved access in labour markets
• Internal firm activities:
◦ Resource allocation/coordination
◦ Efficiency and effectiveness
improvements
◦ Improvements in communication
◦ Goal congruence and motivation of
personnel
◦ Image and reputation building
In terms of external incentives, there is growing
evidence to suggest that both the capital and labour
markets respond favorably towards companies
that report on their IC (Garcia-Ayuso, 2003; Lev,
1999; Lev, 2001). With an IC report in hand, the
capital markets have a better means of assessing
‘true’ firm value. This typically resolves some
uncertainty about the firm, thereby improving
the stock price (Edvinsson and Malone, 1997;
Stewart, 1997). This is discussed in greater detail
later in this chapter.
Further, there is evidence that the labor market
generally holds the firm in higher regard because
the additional information provided about human
resources, as part of a broader IC report, conveys
the sense that these human assets really matter to
the firm (Bukh et al, 1999; Olsson, 1999). Report-
ing IC has the overall effect of enhancing the image
and reputation of the firm among external interest
groups. These findings are consistent with stake-
holder theory, which is one of the theories with
the potential to explain the voluntary disclosure
of IC that is discussed later.
From an internal perspective, firms that have
engaged in attempts to measure and report their IC
typically identify the benefits as being increased
operational efficiency, improved employee morale
and motivation, and better resource allocation
within the organization (Bukh et al, 1999; Flam-
holtz and Main, 1999). Internal stakeholders also
feel that an organization that invests in this extra
reporting dimension are more likely to be better
corporate citizens and have better corporate gov-
ernance than one that does not. Concomitant with
this, the image and reputation of the organization
in the eyes of employees is enhanced by investing
in greater IC transparency.
Two of the incentives to report identified above
are particularly worthy of further attention. First,
there is considerable evidence to suggest that the
capital market views IC as having information
content (Mavrinac and Boyle, 1996). Second, it
is recognized that reporting IC is aligned with
principles of good corporate governance (Garcia-
Ayuso, 2002). Both capital market and governance
effects are discussed below, before a discussion
on why some firms may not measure and report
IC is presented.
Capital Market Effects
As noted earlier, it will nearly always be the case,
particularly for listed entities, that the capital
market will be ahead of accounting reports in
valuing a company. The information contained in
accounting reports is, in most instances, factored
into the market price long before the reports are
distributed by the company.
81

However, the value of intangibles is not
something that the capital market appears to have
estimated terribly well (Lev and Mintz, 1999).
Were it the case that the market capitalisation of a
company is a reflection of its true worth, then we
would not have seen the number of instances in
which companies have been bought for amounts
far in excess of market capitalization. Part of the
difficulty the market faces in valuing a firm lies
in the fact that much of the value often rests in IC
– something for which there is no formal measure
(Marr et al, 2003).
An important incentive for firms to voluntarily
report on their IC, therefore, comes in the form
of the benefits likely to accrue to the firm from
enhancements to market value and also from a
lower cost of capital (Lev, 2001).
Grojer and Johanson (1999) posit that dis-
closing information about IC would improve
capital market efficiency causing a reduction in
the cost of capital as stock prices rise. Without
IC information the capital market is, therefore,
inefficient. Lev (1999, p.15) argues that this inef-
ficiency results in an “uncertainty premium” that
investors will require in order to convince them
to invest in a business that is opaque in respect
of information on its IC. A direct consequence
of this lack of transparency is an increased cost
of capital which leads to lower investment and
growth (Lev, 1999).
Retarding investment may have dramatic
social consequences manifested, for instance, in
the form of inhibited growth in sectors such as
health and general science that are increasingly
important to ensuring quality of life in economies
characterized by aging populations. In a situation
like this it seems, therefore, that not reporting IC
actually destroys value (Lev, 1999).
Garcia-Ayuso (2002) continues this theme
by noting that the absence of IC information is
likely to make stock prices more volatile. Such
volatility creates uncertainty that increases the
spread in bid versus ask prices (Boone and Ra-
man, 1999). Significantly in light of recent high
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Intellectual Capital Measurement and Reporting
profile corporate accounting scandals (e.g. Enron,
Worldcom etc) and the damage done to small
investors in those companies, the information
asymmetry due to the absence of IC information
increases the opportunity for insider gains. Such
gains effectively represent an appropriation of
wealth by larger shareholders or by insiders who
are more likely to be in the know when it comes
to the ‘true’ value of a company’s IC (Aboody
and Lev, 2000).
Lev (1999) also makes a convincing argument
in favour of companies disclosing information on
their IC by stating that there is a need to restore
relevance to accounting:
“When the reports are not informative, the infor-
mation conveyed by them will be largely unrelated
to capital market variables….The information
conveyed by key financial variables in U.S. corpo-
rate financial statements has become less relevant
to the valuation of securities in capital markets.
This, despite the constantly increasing demand
for valuation-relevant information by investors,
and the continuous efforts of policymakers (SEC,
FASB) to improve the quality and reliability of
financial information” (p.3).
There is no reason to believe that any developed
market outside the U.S. is better off in terms of the
quality of information being disclosed. In fact, it is
widely believed that the U.S. markets exhibit the
most developed reporting behaviors (Lev, 1999).
This being the case, there is presumably an even
greater need for IC information to be disclosed
to capital markets outside the U.S.
Further evidence that capital markets are start-
ing to demand IC information comes from Deng
et al (1999) who found that knowledge of patents
held by a firm positively affects shareholder value
via a market pricing adjustment. Barth et al (2001)
corroborated this ‘analyst effect’ in finding that
analysts effectively reward firms that report on
certain IC by giving more extensive coverage to
them. There are thus significant capital market
Intellectual Capital Measurement and Reporting
effects for international firms through the report-
ing of IC and the measurement and disclosure of
how they are managing their intellectual capital
and intangible resources.
Corporate Governance and
Fiduciary Reporting incentives
Garcia-Ayuso (2003, p.600) contends that man-
agers believe:
“…the voluntary disclosure of information on in-
tangibles has positive effects on their governance
mechanisms and strengthens relationships with
their stakeholders, as well as their image”.
Sackman et al (1989) believe that better re-
ported information about human resources might
allow human resources to be allocated more ef-
fectively within organizations and may further
enable gaps in skills and abilities to be more easily
identified. It might also facilitate the provision of
more comprehensive information to investors or
potential investors, thereby furthering governance
objectives relating to communication to external
parties (Flamholtz 1996; Lank, 1997).
In addition, there may be public policy benefits
that result from reporting IC. A negative conse-
quence of traditional reporting practices is that
because human resource development appears
as a cost rather than an investment, enterprises
are encouraged to under invest in training. This
can contribute to recruitment and retention dif-
ficulties within the enterprise and can lead to an
over-reliance on the public sector to support the
required levels of training. Better ways of measur-
ing and reporting human resources might therefore
encourage greater private investment in education
and training (Johanson, 1998; Olsson, 1999).
WHY Do soME FiRMs REPoRT
WHilE oTHERs Do noT?
Explaining differential reporting patterns is diffi-
cult but it should be recognized that not reporting
IC does not necessarily mean that management
is ignorant of the role that IC plays in driving
company performance. There is a multitude of
reasons as to why companies may not want to
focus the attention of external parties on their IC
base. For instance, perhaps management views
its current level of IC as an area of relative weak-
ness and does not want to draw undue attention
to it. Further, management may feel that it is a
source of competitive advantage it does not wish
to highlight in the public domain. As Williams
(2001) observes:
“To maintain any competitive advantage it has,
a firm could reduce the IC disclosure levels in an
effort not to signal competitors and others as to
where potential opportunities may lie” (p.201).
Grojer and Johnason (1999) share this view
in suggesting that companies may be reluctant to
voluntarily disclose information on IC items as
the data may be thought too sensitive or important
to disclose.
Both of these are plausible reasons for not
having reporting systems in place that adequately
report on a company’s IC. It may be the case,
therefore, that management is managing its IC
actively, and has mapped out a plan as to how it
will lead the organization to greater success, but
is being quiet about its efforts.
On the other hand, there are clear incentives,
as outlined above, for companies to report IC.
In addition to these, companies may realize
that reporting what other companies report is a
83

strong defence against possible accusations that
they ignore their IC, and do not manage it well
(Guthrie and Petty, 2000). Moreover, it may be
that companies in Australia, distanced from the
European hub of IC reporting, have the intention of
reporting on their IC, but see value in waiting until
another organization incurs the costs associated
with establishing how such information should
be efficiently reported (Petty, 1999).
Finally, companies that are reporting their IC
may have bought into the argument previously
outlined that efficiency gains and productivity
improvements will flow from communicating
information about their IC to an outside audience
(Lev, 1999; Lev and Zarowin, 1999). Eventually, it is
likely that a critical mass of reporting organizations
will be reached, and this will increase the number
and clarity of calls for some structure to be imposed
on the reporting process. It is at this juncture that
regulators and policymakers will probably become
active in working towards establishing a common
reporting standard (Guthrie et al, 1999).
Thus, although the incentives to voluntarily
report on IC seem clear to researchers and pun-
dits in the IC field, the more significant hurdle
is convincing the executives within companies
who are responsible for preparing the external
reports to include IC in those reports. Assuming
empowered executives already are convinced, it
is logical to expect to find IC being reported in
company’s annual reports because executives will
want to demonstrate that they are focusing on what
really matters (Hines, 1988). In addition to this,
as awareness of IC has undoubtedly developed
fairly rapidly in relative terms during the past
decade, both in the research community and within
the practitioner community (Guthrie et al 1999;
Stewart, 1997; Sveiby, 1997), it seems reasonable
to expect that the extent of voluntary reporting
will increase over time. It also seems reasonable
to believe that it will be possible to observe the
transference of this practice to the wider corporate
community beyond the initial reporting acolytes
hailing from a few Nordic nations.
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Intellectual Capital Measurement and Reporting
Producing an iC Report
A detailed prescription as to how an IC report
could be developed is beyond the scope of this
chapter. However, in the interest of providing a
perspective on the matter that can be colored in by
readers in other ways, we present here an initial
exploration of the subject.
The process involved in producing an IC report
need not be overly costly and time consuming.
Many firms already capture the data required to
feed into the reporting process. Much of the data
are collected already as part of the process of
monitoring people and systems, as part of strategy
formulation, and in the course of gathering com-
petitive intelligence and benchmarking competi-
tive forces with internal performance.
Many firms already produce IC accounts that
appear in the company annual report as an exten-
sion of the traditional audited financial accounts.
The consulting firm Celemi has for many years
produced such accounts. There is no universally
accepted “correct” approach to developing an IC
report, but Celemi’s approach offers one example
of how an IC report can be produced.
In 1995, Celemi published the world’s first
Intangible Asset Monitor (IAM) as part of the
company annual report. The IAM is a tool very
similar in design to that which we envision would
provide most entities with maximally useful IC
disclosure. Celemi classifies its intangibles into the
three categories of individual competence, external
capital, and internal capital. Celemi acknowledges
the difficulty in measuring the value of IC items
with complete accuracy. However, Celemi also
points out that what the stakeholders are interested
in is reported on more comprehensively than if
the IAM were not in place. The end result is that
the stakeholders receive more decision-useful
information (Sveiby, 1998).
Using the IAM, the intangible assets are
shown to be increasing or decreasing in value
during a period. That is, a directional account of
changes in the stock of IC is given. A review of
Intellectual Capital Measurement and Reporting
the techniques used by Celemi to value some of
its ‘new intangibles’ provides a focal point for
considering how traditional accounting systems
may be modified to accommodate the reporting
of such items.
From Celemi’s IAM, it is clear that Celemi
views its employees and their competencies as its
most important business asset. Celemi uses non-
financial metrics to assess the value represented
by its employees. The idea is to report the same
metrics each year to facilitate benchmarking
over time. This conveys an understanding about
whether the base of human capital is progressively
improving or declining.
Measures of employee competence are grouped
into the categories of growth/renewal, efficiency,
and stability. The growth/renewal factors include
measures of employee education level and aver-
age years of professional experience. Efficiency
measures include value added per expert (pro-
fessional), and value added per firm employee.
Measures of stability include expert seniority
expressed in years and the median age of all
employees. Similar measures are used to assess
the growth/renewal, efficiency, and stability of
the external capital and internal capital classes
of intangible asset. The relevant metrics for each
class of asset are calculated using data captured
while doing business, typically from other exist-
ing business systems, such as the human resource
management system, and are integrated into the
financial reporting system. When necessary, new
data warehouses are created, and new data capture
points established, to feed the necessary data into
the system.
The combination of these measures across the
three categories of IC creates a picture of the state
of Celemi’s IC and provides a means for assessing
the contribution IC makes to the value of the firm
as a whole. Although most of the measures are
not financial, it is certainly the case that reporting
them places stakeholders in an improved decision
making position with respect to their financial
interest in the firm. The time-proven maxim
“what gets measured gets managed” ensures that
the IC report establishes a new dialogue and a
new reality in terms of how IC is viewed by all
stakeholders, whether they are inside or outside
of the organization.
The reporting framework may be rudimentary,
but Celemi is at least trying to measure what re-
ally creates value. This is a significant departure
from traditional reporting systems with a focus on
only those intangibles that are purchased, tangible
assets, and historical costs. It seems eminently
more sensible to make an effort to measure and
report that information which is most likely to be
useful for decision making purposes. To this end,
Celemi’s IAM is a step in the right direction and
provides one example of how IC can be reported
and of the process involved in producing an IC
report.
inTEllECTuAl CAPiTAl
REPoRTinG: PERsPECTiVEs
FRoM PRACTiCE
This section examines the perspectives of accoun-
tants on IC reporting elicited through a survey
questionnaire. This is considered important as
accountants are involved in the preparation of
financial reports as well as the assessment of these
reports in terms of the adequacy of corporate dis-
closure. It is considered that doing so will provide
an important validation of the thesis of this chapter
– that companies, and international companies in
particular – should report their IC. Respondents
to this study were all members of the accounting
profession located in Hong Kong, held at least
one degree in accounting and/or finance and had
at least five years of experience in the financial
industry. 1 They ranged in age from 28 to 63. Fifty-
six percent of the respondents were male and 44
percent were female. Eight percent held the role
of Chief Financial Officer in a public company
or in a large small to medium sized enterprise. A
further fourteen percent were public practitioners.
85
 Intellectual Capital Measurement and Reporting

Table 2.
Twenty-eight percent worked as equity analysts,
or in the banking sector generally. Thirty-six In overall terms, how useful and relevant to decision-making
percent worked in senior positions in commerce do you find the accounting information that is presented to
external stakeholders by listed companies in Hong Kong?
and industry. The remaining respondents were (%), N=238
either self-employed, academics, or worked in Useful 35
other unspecified roles in government. They were
Neutral 14
taken as sophisticated and active consumers of
Not useful 51
externally reported company financial informa-
Total 100
tion for the purpose of this research. Furthermore,
these respondents were considered to be aware of
the issues relating to the management challenges
to identify obvious respondent threads.
faced by international organizations.
As Table 2 shows, more than half the respon-
The questionnaire was designed and developed
dents (51%) did not find accounting information
using Kelly’s (1955) Repertory Grid procedure for
provided by companies generally useful. In fact,
eliciting respondent vocabulary. Kelly’s procedure
only 35% of respondents found accounting infor-
is designed to ensure that the terminology used in
mation presented by listed companies in Hong
a survey instrument is consistent with terminology
Kong useful for decision-making purposes. This
the respondents would ordinarily use to describe
is congruent with claims made in the literature
a particular issue, construct or phenomenon. A
that accounting has lost its relevance (Johnson
total of 18 candidates pre-tested the questionnaire
and Kaplan, 1987; Lev, 1999).
as a check on questionnaire wording, clarity and
However, responses to question 1 in Table 3
construct validity. The questionnaire contained
reveal that 68% of respondents used the annual
20 questions. Three of the questions were open-
report to learn more about a company, and as an
ended. The remaining questions were closed, but
aid to decision-making. Question 2 in Table 3
several of these permitted elaboration by respon-
further shows that an overwhelming number of
dents on their answer. The survey instrument was
respondents (96%) felt that Hong Kong companies
administered during professional development
need to disclose more information and be more
sessions, held during 2004, and also during office
transparent. The finding in question 2 is reinforced
visits, to a total of 238 respondents. All responses
by the response to question 3 in Table 3 which
were useable.
shows that a large majority of respondents (92%)
The questionnaire was administered face-to-
did not think that Hong Kong companies are
face as a control on the identity of the respondent
required to disclose enough information in their
and to ensure the integrity of the data. The question-
annual report. As shown in question 4 in Table
naires were intentionally designed to be simple so
3, the majority of respondents were in favor of
as to encourage respondents to give genuine and
the accounting profession and/or the regulatory
considered responses rather than resort to random
authorities imposing additional IC disclosure
entry. The questionnaire was intended to produce
requirements on listed companies in Hong Kong.
data that would both describe practice and also
This call to action on the specific need for compa-
enable normative suggestions to be made regarding
nies to give more IC information is consistent with
the regulation of financial reporting. Data were
the finding that Hong Kong companies need to be
analyzed using simple descriptive statistics to
more transparent in general. Question 4 presents
obtain percentage values for responses to each of
a normative view of what should happen that is
the closed questions. The open-ended responses
strongly aligned with the positive view reflected
were tabulated and analyzed on a content basis

86
Intellectual Capital Measurement and Reporting
Table 3. Current state of reporting - perceived
decision usefulness and transparency
Question
1. Do you use the annual report of companies you
are interested in learning
more about as an information source for making
decisions? (%), N=238
2. Do you think companies in Hong Kong need to
disclose more information and be more transpar-
ent? (%), N=238
3. Do you think companies in Hong Kong are
required to disclose enough information on their
IC in their annual report? (%), N=238
4. Do you think that the accounting profession
and/or the regulators in Hong Kong should
require listed companies in Hong Kong to provide
more information on their IC? (%), N=238
in question 3 that not enough is happening.
Most respondents (91%) believed that they
would find IC reports decision-useful, if they
were made available. Only a small number (9%)
thought they would not find IC information use-
ful in supporting decisions. It may be that these
respondents either could not conceive of what
information would be provided by the IC reports,
or they have so often made decisions without
having access to formal reports on IC informa-
tion that they felt equipped to continue along the
same path unaided.
When asked about how familiar they were with
different types of IC reports, most respondents
(82%) claimed to be familiar with the Balanced
Scorecard. However, in the follow-up question
that asked them to explain what the Balanced
Scorecard is, few respondents actually knew. Only
26 respondents (11%) gave an accurate descrip-
tion of the Balanced Scorecard. For instance, one
respondent wrote: “it is a method for managers
to do staff performance review”. The high rec-
ognition factor by respondents for the Balanced
Scorecard relative to the other two measurement
tools (discussed below) is probably explained by
respondents recognizing the name of the Balanced
Scorecard as it is well known. Respondents were
Table 4. Utility and awareness of IC reporting
tools
Yes No Question Yes No
68 32 1. Certain tools are designed to provide informa- 91 9
tion on a company’s IC. Do you think you would
find information provided by such tools useful in
making investment decisions regarding a company?
(%), N=238
96 4
2. Are you familiar with the Balanced Scorecard? 82 18
(%), N=238
8 92 3. Are you familiar with the Intangible Asset Moni- 19 81
tor? (%), N=238
4. Are you familiar with the Skandia Navigator? 12 88
87 13 (%), N=238
seemingly more honest in their claims to know
about the Intangible Assets Monitor. As question
3 in Table 4 shows, only 19% of respondents
claimed to be familiar with it. However, as for
the Balanced Scorecard, in the follow-up ques-
tion that asked them to explain what it is, few
respondents actually knew. Only 3 respondents
(<2%) gave written answers that indicated they
had substantial knowledge about the Intangible
Assets Monitor. Even fewer respondents (12%)
were familiar with Skandia’s Navigator. In the
follow-up question that asked them to explain what
it is, the same three respondents that accurately
explained the Intangible Assets Monitor also ac-
curately described the Navigator. The remaining
respondents, who claimed to know Skandia’s
Navigator, did not know it.
As shown in question 1 of Table 5, 88% of
respondents thought that voluntarily disclosing
IC information should have a positive impact
on market capitalisation. However, question 2
in Table 5 shows that when asked if they would
themselves pay more for a company that provided
better information on its IC, 71% of respondents
gave a negative response. Respondents were fairly
evenly divided when asked whether voluntary
IC disclosure by listed companies is currently
being rewarded in Hong Kong. When considered
together with the results of question 1 in Table 5,
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 Intellectual Capital Measurement and Reporting

Table 5. Perceived value of IC disclosure Table 6.

Question
1. Do you think that a company voluntarily disclosing
additional information on its IC should be rewarded
by the capital market in the form of a higher share
price? (%), N=238
2. Would you pay more to invest in a company
rich in IC if that company offered better and more
transparent information on its IC in the company
annual report? (%), N=238
3. Do you think there is currently a positive associa-
tion between share price and the extent of voluntary
IC disclosure for Hong Kong listed companies?
(%), N=238
it emerges that although a majority of respondents
(88%) thought companies should achieve higher
shares prices if they voluntarily disclosed IC, fewer
than half of the respondents (47%) believed this
was actually happening.
There are positive signs of change, however.
As shown in Table 6, 64% of respondents be-
lieved that companies listed in Hong Kong are
reporting more IC information than they were
ten years ago.
Question 1 in Table 7 shows that a majority of
respondents (60%) felt they were in a poor or very
poor position to get hold of information on the IC
of listed Hong Kong companies through public
sources. Fewer than half this number (28%) rated
their ability to obtain such information as good
or very good. The findings presented in question
1 are in stark contrast to the results shown in
question 2 which show that if private information
channels were used a majority of respondents
Yes No Do you think Hong Kong listed companies are disclosing
more information on their IC than they did 10 years ago?
88 12
(%), N=238
Yes 64
No 26
29 71
No idea 10
Total 100
47 53
(68%) felt they would be able to obtain good or
very good information on the IC of listed Hong
Kong companies. Only 16% of respondents still
felt they were in a poor or very poor position to
obtain such information once private information
sources were considered.
Overall, the survey data offers an empirical
account of how a group of financial profession-
als uses IC information and the value that this
group imputes to IC reporting. With reference
to this important stakeholder group, a number
of conclusions can be derived regarding: (i) the
utility of information provided by the traditional
financial accounting reports; (ii) the role that the
annual report plays in communicating information
to significant decision-making externalities; (iii)
the desire for a change to the content and format
of those reports; and (iv) the benefits to have from
a greater incidence of IC reporting.
The results of the survey clearly indicate that
respondents did not find information provided
by the traditional financial accounting model all
that useful. This agrees with the literature that
suggests the lost relevance of accounting data.

Table 7. Respondent ability to obtain information on the IC of listed Hong Kong companies through
public versus private information sources?

Statements Very Poor Neutral Good Very Total

poor good
1. Please rate your ability to obtain information on the IC of listed Hong 18 42 12 22 6 100
Kong companies through public information sources? (%), N=238
2. Please rate your ability to obtain information on the IC of listed Hong 7 9 16 39 29 100
Kong companies through private information sources? (%), N=238

88
Intellectual Capital Measurement and Reporting
However, respondents were still using the annual
report to learn about a company. This finding
is somewhat anomalous in light of the finding
that respondents claimed not to find information
provided by the traditional financial accounting
model useful. However, it may be explained by
the fact that, although many respondents did not
find accounting information useful, they did find
the annual report useful. Furthermore, they may
simply refer to the annual report to check that they
are not missing any information without actually
finding any relevant and useful information.
The respondents were firmly of the view that
alternative reporting frameworks were required. The
demand for a market response certainly seems to exist
with 88% of respondents believing that voluntary
disclosure of IC by companies should be rewarded
by the capital market in the form of a higher share
price. An even greater number of respondents (91%)
thought that having access to IC reports would assist
them in making investment decisions.
In deciding what type of report on IC should
be required and what format the report should
take, it is interesting to note that there was a very
low level of familiarity with the Intangible Asset
Monitor (19%) and with Skandia’s Navigator
(12%). A greater number of respondents knew of
the Balanced Scorecard, but few (11%) actually
understood what it is. The high recognition factor
by respondents for the Balanced Scorecard relative
to the other two measurement tools is probably
due to the fact that the Balanced Scorecard is well
known. The data suggest that, at this juncture,
there is no need to give one particular reporting
tool greater consideration than any other when
looking at prescribing a method and format for IC
reporting by multinational companies. In contrast
to the finding that companies voluntarily reporting
IC should benefit from higher share prices, most
respondents (71%) reported that they would not
themselves pay more for greater IC transparency.
It seems that respondents hold the normative view
that increased transparency should be rewarded
via a share price increase, but are not prepared to
use their own money as part of that reward.
This may be attributed, in part, to the fact that
68% of respondents claimed to be in a good or
very good position to obtain information on IC
through private information sources. Therefore,
there is no need for this group to pay more for
increased transparency as they are already getting
the information they require to make informed
investment decisions. This finding is significant
because it suggests that one group of stakeholders
(in this case, financial professionals) is able to
gain an advantage over other stakeholder groups
because of information asymmetries created by
special relationships. This results in an uneven
playing field in which some stakeholders are
empowered, and others are not. There may also be
legal consequences for actors who use information
obtained through private channels. An equitable
balance could be restored, and potential legal
hazards avoided, if companies were to report pub-
licly the information they currently communicate
privately to certain elite stakeholder groups.
ConClusions
In summary, this chapter argues for the measure-
ment and reporting of IC. If international com-
panies are to compete effectively, they need to
invest in structural, relational and human capital
as outlined in this chapter. In so doing, a means
of making sense of these investment decisions,
monitoring the success of these initiatives and
communicating the importance throughout global
business contexts are required. As this chapter has
discussed, traditional financial reporting models
are insufficient for these purposes. Hence there are
significant benefits that ensue from the measure-
ment and reporting of IC for global companies.
These arguments are validated by the results of
a research study that presents the perspectives of
finance professionals involved in the production
89

and evaluation of the financial statements and
reports of large international companies.
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EnDnoTEs
1
Brennan and Connell (2000) being an excep-
tion.
2
Participants to the research were drawn
from CPA Australia, which is one of the
world’s largest professional accounting
bodies with approximately 112,000 mem-
bers. Over 8,500 members live and work in
Hong Kong. Members are highly trained in
financial matters. To become a member, one
must graduate from a recognized university
with a degree in accounting, obtain several
years of advanced work experience and sit
for five post-graduate professional examina-
tions. Members are required to participate
in approved annual continuing professional
development hours at a minimum level of
20 hours per annum. Further, members of
CPA Australia are known to possess core
financial skills relating to the reading and
93
 Intellectual Capital Measurement and Reporting

interpretation of annual reports. Though

the need and demand for information by
the members will differ to that of financial
analysts, their understanding of company
and market financial matters is likely to be
similar to that of the analysts.

94
 95

Chapter 6
National Intellectual
Capital Stocks and
Organizational Cultures:
A Comparison of Lebanon and Iran
Jamal A. Nazari
Mount Royal College/ University of Calgary, Canada

Irene M. Herremans
University of Calgary, Canada

Armond Manassian
American University of Beirut, Lebanon

Robert G. Isaac
University of Calgary, Canada

ABsTRACT
Using a set of macro-level socio-economic indicators, we first explore whether two Middle Eastern coun-
tries (Lebanon and Iran) provide the foundation for organizations to develop their intellectual capital
(IC). Then, we investigate the role of micro-level organizational characteristics that might support or
hinder the development of IC management processes within organizations. The insight gained through
our comparison will shed light on some important organizational attributes that foster the management of
IC for wealth creation. The analysis has important implications for multinational corporations (MNCs)
that have operations in the Middle East, are contemplating business involvement in the Middle East, or
that have employees with Middle Eastern origin.

inTRoDuCTion as serious business investment considerations. In

The Middle Eastern countries are generally per-
ceived as hotbeds for political upheaval rather than
DOI: 10.4018/978-1-60566-679-2.ch006
spite of this perception, many multinational com-
panies (MNCs) are looking for opportunities in
this region and view the Middle East as a growing,
lucrative marketplace. The Middle East has great
potential for becoming a significant international

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 National Intellectual Capital Stocks and Organizational Cultures
economic force because it contains vast natural
and human resources. Its strategic geographical
position places it at the center of the global stage,
making it an arena for competing global powers.
As trade between the industrialized world and
Middle Eastern countries continues to grow, the
importance of gaining an understanding of the
region’s complex and diverse people will become
more apparent to MNCs operating in developed
nations.
Spurred by the desire to gain access to untapped
markets and resources, MNCs have been a major
force in increasing the volume of international
trade worldwide. As a result of the increased pace
of globalization, MNCs in developed countries
are continuing to expand their operations to
countries very different from their own in regard
to business environment and practices, economic
stability, level of economic development, and
cultural characteristics. Because of this diversity,
one popular means of entering new territories has
been through the formation of strategic alliances
called international joint ventures (IJVs). As host
countries desire to maintain some control over the
operations of MNCs, in some settings an IJV is
the only entry option available to foreign inves-
tors. As well, an IJV arrangement helps to ensure
that local stakeholders share in the economic and
social benefits. From the entry options granted by
the Iranian government to foreign firms, the IJV
is the only possibility for establishing a long-term
presence. The buy-back scheme where a foreign
firm supplies plants and machinery in exchange
for the goods that will be produced by means of
such facilities is more of a financing instrument
and a compromise solution for foreign invest-
ment in the short-run. The build-operate-transfer
(BOT) arrangement allows foreign firms to invest
in projects that are operated for a certain period
of time by the foreign investor before being fully
transferred to the Iranian government. For these
reasons, IJVs are the only entry option for invest-
ment by foreign companies seeking to establish
a long-term presence in Iran. The high level of
96
political instability in Lebanon has made the IJV
arrangement very popular as a means of entry for
foreign companies. By having a local partner, a
foreign firm can reduce the risks of operating
in a highly uncertain business environment and
minimize the losses resulting from potential dis-
ruptions to operations.
The prevalence of IJVs in the globalization of
business activities has been the subject of numer-
ous studies (Cyr, 1995; Geringer & Hebert, 1991;
Harrigan, 1985; Killing, 1983), many of which
investigate the human resource practices of MNCs
that pertain to their local operations (Bjorkman
& Lu, 1999; Lu & Bjorkman, 1997, 1998; Tayeb,
1998; Wang & Satow, 1994; Wasti, 1998). The
question that arises is if human resource prac-
tices should follow the established policies of the
MNCs or those of the local partner (Beechler &
Yang, 1994; Hannon, Huang, & Jaw, 1995; Lu &
Bjorkman, 1997, 1998; Monks, 1996; Rosenzweig
& Nohria, 1994). In this regard, firms have a con-
tinuum of options in trying to operate effectively.
At one extreme is a policy of standardization of
human resource practices across all international
operations. At the other end is a policy of complete
customization to local practices. In between these
two extremes are many combinations of blending
standardization with local responsiveness (Doz
& Prahalad, 1981; Hannon et al., 1995; Lu &
Bjorkman, 1997; Prahalad & Doz, 1987; Schuler,
Dowling, & De Cieri, 1993; Taylor, Beechler, &
Napier, 1996).
The manner in which employees are treated
in international operations have taken on in-
creased importance with the realization that in
much of the business world of today wealth is
created increasingly by off-balance sheet assets,
often called intangibles. These intangible assets
include, in part, reputation, corporate responsibil-
ity, talented people, relationships, efficient and
effective internal processes, and relationships,
often referred to as intellectual capital (IC). IC is
generally recognized as having three broad dimen-
sions which are instrumental to wealth creation:
National Intellectual Capital Stocks and Organizational Cultures
structural, human and relational capital. Struc-
tural capital refers to the processes, technology,
databases, and communication avenues that aid
in development of both knowledge and relation-
ships. Human capital refers to the knowledge and
capabilities of the employees. Relational capital
refers to the customer and supplier loyalty and
other stakeholder relationships that an organiza-
tion has developed.
To the extent that an organization is able to
derive wealth from its IC depends not only on its
national infrastructure of education technology
and trade policies but also on its ability to align
its structure, culture, climate, and value systems
to support wealth-creating assets (Chandler, 1962;
Collins & Porras, 1997; Elliott, 1992). Previous
research has found a relationship between the
extent of an organization’s IC and certain positive
characteristics in its culture.
This chapter investigates the extent that
micro-organizational characteristics might help
or hinder the development of IC management
processes when a nation appears equipped with
the appropriate foundation for wealth creation,
as measured by macro-level, socio-economic
indicators. It explores the following research
question: What macro and micro characteristics
are conducive to IC management processes in
developing countries?
The rest of this chapter is organized in the
following manner. First, Iran and Lebanon are
compared on the level of national IC stocks. This
is followed by a discussion of organizational cli-
mate and culture variables that are conducive to
the IC management processes. Methodology and
data collection is discussed next. Then, the results
of our statistical analysis are explained. Finally,
the conclusions, implications and potential future
studies are reported.
BACKGRounD
Beck (1998) in her book about the knowledge
economy, suggested that certain characteristics
must exist to gain the advantages of developing
knowledge-related resources, a sub-component of
IC. In part, she suggested that countries with flex-
ibility and transparency, access to electronic infor-
mation technologies, and attractiveness of quality
of life will have a foundation on which to develop
wealth-creating IC assets. These characteristics,
at a minimum, will allow human knowledge to
develop and for countries to retain their asset base
of knowledge workers. Her suggestion was further
investigated by Hervas-Oliver and Dalmau-Porta
(2007). They found technological capability and a
government policy oriented to business to be key
variables to what they refer to as IC stocks within
nations that can lead to wealth creation.
Bontis (2004) also investigated the IC stocks
of a nation to determine their relationship to the
nation’s financial capital, as measured by GDP per
capita. Although Bontis (2004) studied the Arab
region, neither Lebanon nor Iran was included in
the study. Bontis (2004) used a number of macro-
indicators that he termed human, process, market
(relationship), and renewal capital to measure the
nation’s relationship between these indicators and
its GDP per capita. However, none of these studies
combined macro readiness indicators (or what are
referred to as IC stocks) with micro-organizational
indicators of culture and climate to determine if
one might support or hinder the other. Initially, a
nation must lay the foundation for IC development
through macro infrastructure (such as education,
GDP, Internet access, and more). However, stocks
or inventories of IC might lie dormant and fail to
create wealth for organizations if the structure,
culture, and climate within those organizations are
97
 National Intellectual Capital Stocks and Organizational Cultures
not integrated with appropriate IC management
processes for extracting the potential from these
IC inventories.
Comparison of lebanon and
iran: national iC stocks
Previous studies of IC have called for additional
research at the national level (e.g. Beck, 1998;
Bontis, 2004; Hervas-Oliver & Dalmau-Porta,
2007). Therefore, we now discuss the national IC
stocks that build the foundation for organizations to
create their own IC stocks. We compare Lebanon
and Iran by beginning with a general overview of
the two countries. Then, we provide macro-level
indicators that proxy for financial and IC stocks.
National IC stocks are separated into three cat-
egories: structural, human and relational.
General Overview and Financial Capital
Despite continued political instability, Lebanon,
a small country with an approximate population
of 4.06 m (Economist Intelligence Unit, EIU,
2008) on the Mediterranean coast is working
on repositioning itself as the hub linking the
Arab East and the European West. According
to Lebanon’s 1926 constitution, the country is a
secular Arab state with a parliamentary democracy
and a free economy (EIU, 2008). Based on the
quasi-democratic political system, the power in
Lebanon’s political system is shared among three
largest religious sects: Sunni Muslim, Maronite
Christian, and Shia Muslim. Individuals support
the heads of political groups from their own reli-
gious communities (EIU, 2008).
Lebanon’s government has facilitated and
encouraged investments by foreign companies.
According to the US Commercial Service Report
(2008, p. 5), the incentives include “a free market, a
strong laissez-faire commercial tradition, a highly
dollarized economy, the absence of controls on
the movement of capital and foreign exchange,
strict bank secrecy, a highly educated labor force,
98
a good quality of life, and limited restrictions on
investors.” The country experienced a high degree
of stability and attracted many tourists until 2006.
After the imprisonment of two Israeli soldiers by
Hezbullah in 2006, a month-long conflict with
Israel destroyed infrastructure across the country
and caused massive loss of life. Since the call by
the UN Security Council for the cessation of hos-
tilities, Lebanon’s economy has been recuperating
from the damages.
Iran is a country that has been receiving a lot
of attention in the current media. Unfortunately,
most of this attention has been highly negative and
focused on Iran’s nuclear programs and its political
influence in the region. Iran, a vast country that
covers an area as large as Germany, France, UK,
and Spain has many unique characteristics and
presents itself as an interesting possibility for a
cross-cultural study in IC management.
Iran is an Islamic republic, with an Islamic
constitution and legal system which is adminis-
tered in conjunction with Sharia law. The clergy
act as judges although the country is a republic
and a democracy. Since the Islamic Revolution
in 1979 there have been forces at play attempting
to revamp the Iranian consciousness away from
the globalizing values advocated by the previous
regime. An inward looking ideology has been es-
poused and defended on the grounds of religious
beliefs. The argument put forward has been that
there is a need to counter and reject universalistic
and hegemonic Western ideologies by reverting to
particularistic local traditions. The ultimate effect
of these trends has been a cessation and indeed
a reversal of the integration of Iran into global
social forces. Attempts have been made to attract
foreign investment, reduce red tape, and boost
non-oil exports. Privatization initiatives have been
undertaken by the government due to a realization
that it cannot ignore the forces of globalization
and the demands of international agencies.
Defined as the total market value of all final
goods and services produced within the country
generally within a year, GDP (gross domestic
National Intellectual Capital Stocks and Organizational Cultures
product) is used as a proxy for the nation’s
financial capital (Bontis, 2004). Because coun-
tries traditionally move from an agricultural to
a manufacturing to a service economy, there is
generally a high correlation between GDP and
IC stocks. In 2006, Lebanon’s GDP (nominal) per
capita is $5,603, whereas Iran’s is $3,108. Market
capitalization of listed companies as a percentage
of GDP is 36% for Lebanon and Iran’s is 17%.
In current US dollars, market capitalization for
Lebanon is approximately $8 billion and Iran’s is
approximately $38 billion. However, the presence
of a strong service economy is also an important
indicator. In 2007 Lebanon’s service economy as
a percentage of GDP was 77.1 percent, and Iran’s
was 44 percent (WDI Online, 2007). In summary,
on all financial capital indicators, Lebanon’s
economy outperforms Iran’s.
Structural Capital
Good technology, telecommunication systems,
and electronic access lay the basis for building
assets in human and relational categories of IC
in organizations. Technology aids in gathering,
organizing, and sharing a company’s informa-
tion by developing databases to house and access
knowledge. Systems of communication help
to link a company to its suppliers, customers,
employees, and other stakeholders to help build
strong relationships. Good technology also aids
in creating work environments for sharing and
transferring knowledge among workers.
Lebanon’s telecommunications system was se-
verely damaged by the civil war and more recently
by the Israeli invasion in 2006. Reconstruction
efforts are well under way. According to a recent
estimate, this small country has 6,998 Internet
hosts and approximately 600,000 Internet users
(EIU, 2008), resulting in 10.2 personal computers
and 23.4 Internet users per 100 persons. Iran, a
much larger country, has 5,269 Internet hosts and
approximately 4.3 million Internet users, result-
ing in 10.6 personal computers and 25.7 Internet
users per 100 persons.
In Lebanon there are 678,000 telephone lines
in use and approximately 775,100 mobile phone
users. Per 100 persons, Lebanon has 27.2 mobile
phone subscribers. Since 1994 the government of
Iran has taken aggressive initiatives to improve the
telephone system. The number of long-distance
channels in the microwave radio relay trunk has
grown. The number of main lines in the urban
system has doubled; thousands of mobile subscrib-
ers have been served; many villages have been
connected; and the technical level of the system
has improved. According to a recent estimate there
are 14,571,100 telephone lines and 13,659,123
mobile users. Per 100 persons, there are 19.5
mobile phone subscribers (WDI, 2007).
The EIU (2006) has published an annual
e-readiness ranking of the world’s largest 69
economies since 2000. The purpose is to evalu-
ate the technological, economic, political, and
social assets of the countries examined. The ma-
jor variables used to achieve the aggregate score
are: connectivity and technology infrastructure,
business environment, social and cultural environ-
ment, legal environment, government policy and
vision, consumer and business adoption. Thus, it
provides a comparative indication of a country’s
information and communications technology
infrastructure and the ability of its consumers,
businesses and governments to use information
communications technology to their benefit. Un-
fortunately, Lebanon has not been ranked by the
EIU, and therefore no score is available. Iran’s
aggregate score for 2007 was 3.08 out of 10 giv-
ing it the very last rank among the 69 countries.
On the component measuring connectivity and
technology infrastructure Iran’s score was 2.8
compared to 8.1 and 7.9 for the US and Canada
respectively. For structural capital, there is not a
clear leader between Lebanon and Iran, although
Lebanon leads on most indicators. (See Table 1
for more information.)
99
 National Intellectual Capital Stocks and Organizational Cultures

Table 1. Comparison of Iran and Lebanon: Socio-economic macro-level indicators

Iran (2006) Lebanon (2006)

Financial Capital
GDP (nominal) per capita $3,108 $5,603
GDP growth (annual %) 3.06% (1.10)%
Market capitalization of listed companies (% of GDP) 17.41% 36.44%
Market capitalization of listed companies (current US$) $38 billion $8 billion
Structural Capital
Mobile phone subscribers 13,659,123 1,103,376
Mobile phone subscribers (per 100 people) 19.5 27.2
10.2
10.6
Personal computers (per 100 people) (2005 figure)
School enrollment, tertiary (% gross) 26.8 48
43.7 76.5
Service economy as a percentage of total GDP (2007 figure) (2007 figure)
International Internet bandwidth
(bits per person) 53.2 111
Internet users (per 100 people) 25.7 23.4
Human Capital
Literacy rate, adult total 82.4 87.4
(% of people ages 15 and above) (2005 figure) (2003 estimate)
Relational Capital
Exports of goods and services (% of GDP) 41.59 23.71
Exports of goods and services
(annual % growth) 36.66 8.51
Source: World Development Indicators Online (2007)

Human Development of 7.615 and 7.599.

Although level of education and literary are input
indicators, they are often used as proxies for level
of knowledge within a country and therefore a
representation of human capital. The EIU provides
a Quality-of-Life Index which incorporates nine
factors such as health, family life, community
life, material well being, political stability and
security, climate and geography, job security,
political freedom and gender equality. Unfortu-
nately, there is no ranking provided for Lebanon.
The most recent ranking for Iran on the Quality-
of-Life Index is 5.344 giving it a world position
of 88 among 111 countries. The US and Canada
were ranked 13 and 14 respectively with scores
The Quality of Living Survey conducted by
the British Mercer Human Resource Consulting
organization covers 215 cities in the world. In
2008 Beirut’s ranking was 171 worldwide. In a
point system Beirut scored 53.5 points compared
to 52.5 in 2007. Regionally, the Lebanese capital
came ahead of Damascus in Syria and Tehran in
Iran. However, Dubai (83) and Abu Dhabi (87)
are the Middle Eastern cities with the best qual-
ity of living.
The Human Development Index measures
three dimensions of human development: liv-
ing a long and healthy life (measured by life
expectancy), being educated (measured by adult
literacy and enrolment at the primary, secondary

100
National Intellectual Capital Stocks and Organizational Cultures
and tertiary level) and having a decent standard
of living (measured by purchasing power parity
and income). According to the UN’s 2007-2008
Human Development Report, Lebanon received a
score of 0.772 based on the year 2005, giving it a
rank of 88 and Iran’s score is 0.759, ranking it 94
out of 177 countries (1 is the best rank). Regard-
ing literacy, Lebanon’s estimated adult literacy
rate was 97.4 percent in 2003, and Iran’s, 82.4
percent in 2005. In summary, Lebanon’s scores
for human development are better than Iran’s for
most indicators. (See Table 1)
Relational Capital
A country’s imports and exports, willingness to
participate in international agreements, and open-
ness to foreign investment can indicate the types
of relationships that it has with other countries.
Both Lebanon and Iran are eager to attract inflows
from other countries and provide a liberal invest-
ment climate.
In Lebanon a framework for privatization law
was passed in 2000 which opened possibilities for
privatization initiatives in many industries includ-
ing electricity, water, and telecommunications. The
government will seek strategic partners for these
projects among local and foreign companies. As
of 2002, French, Italian, German, British, Korean,
and Finnish companies were the predominant
investors in Lebanon. Their presence is most
strongly felt in the fields of electricity, water, and
telecommunications (U.S. Commercial Service,
2008). Since the lifting of the passport restric-
tion in 1997 many large US firms have opened
branches or regional offices in Lebanon. These
include Microsoft, American Airlines, Arthur An-
derson, Coca-Cola, FedEx, UPS, General Electric,
Parsons Brinckerhoff, Cisco Systems, Eli Lilly,
Computer Associates and Pepsi-Cola, some of
which specialize in knowledge products.
Regarding Iran, in an attempt to encourage
diversification of investment initiatives to include
non-petroleum industries, the government has
liberalized investment regulations in recent years
(Nouraei & Mostafavi, 2008). In Iran, there are no
limits on repatriation of earnings if investments
are in industry, mining, or agriculture. Foreign
companies are limited in their entry options.
Foreign direct investment must be in the form of
joint ventures. However, there are no restrictions
on the percentage of ownership in these joint
ventures (Nouraei & Mostafavi, 2008). Among
developed nations the most active investors have
been Germany, Norway, UK, France, Japan,
Russia, South Korea, Sweden and Switzerland.
Some of the MNCs with operations in Iran include
Svedala Industri of Sweden, Tata Steel of India,
Kia of South Korea, Nissan of Japan, Peugeot
and Renault of France, Nestle of Switzerland,
Coca-Cola and Pepsi-Cola of USA, Alcatel of
France, MTN Group of South Africa, Siemens of
Germany, Total of France, Shell of UK/Holland,
Gasprom of Russia, and Lucky Goldstar of South
Korea (Library of Congress, 2006).
Dr. J. Graf Lambsdorff of the University of
Passau was commissioned by Transparency In-
ternational to produce a Corruption Perception
Index (CPI). The score relates to perceptions of
the degree of corruption as seen by business people
and country analysts. The score can range from
10 (highly clean) to 0 (highly corrupt). In 2006
Lebanon had a score of 3.6 and a regional ranking
of 8 among 14 Middle Eastern countries. Its world
ranking was 63 out of 180 countries. In 2007 its
score decreased to 3.0 giving it a regional ranking
of 9 among 14 Middle Eastern countries and a
world ranking of 99. In 2007 Lebanon was one of
the first countries in the Middle East to ratify the
United Nations Convention Against Corruption.
In 2006 Iran’s Corruption Perception Index (CPI)
according to Transparency International was 2.7
giving it a regional rank of 11 among 14 Middle
Eastern countries. Its world rank was 105 out of
180 countries. In 2007 Iran’s CPI score slipped
to 2.5, while its regional rank improved slightly
to 10. Its world rank slipped to 131. In 2001 Iran
joined the Convention on the Recognition and
101
 National Intellectual Capital Stocks and Organizational Cultures
Enforcement of Foreign Arbitral Awards (Nouraei
& Mostafavi, 2008).
An indicator sometimes used as a proxy for
relationship capital representing a countries’
willingness to do business with other countries
is its percentage of exports. In terms of exports
of goods and services as a percentage of GDP,
Iran’s exports were 42% of GDP and Lebanon’s
were 24%.
issuEs AnD PRoBlEMs
The previous discussion provides evidence that
due to the national IC capital, as measured by
socioeconomic macro-level indicators, there is
potential for capitalizing on the opportunities for
creating stocks of IC assets within organizations,
such as MNCs, operating in Lebanon and Iran. The
countries’ GDP per capita, existence of a service
economy, level of education and literary rate,
availability of technology, and transitions toward
increased foreign investment and transparency
suggest a degree of readiness for organizations
to create their own stocks of IC assets. A cursory
examination of the macro-level indicators used as
proxies (See Table 1), along with the background
information we have provided thus far, suggests
that organizations in Lebanon might have a slight
advantage over organizations in Iran in embracing
IC management as a strategic means of achieving
competitive advantage.
However, previous studies have shown that
these macro-level indicators must be coupled with
appropriate organizational characteristics, such as
culture, climate, and structure, to extract wealth
from stocks of IC assets through IC management
processes. Some of these previous studies have
studied the relationship between organizational
characteristics and one aspect of IC management,
such as information sharing (Chow, Harrison,
McKinnon, & Wu, 1999), information technology
(Powell & Dent-Micallef, 1997) or knowledge
creation (Chua, 2002; Leonard-Barton, 1992,
102
1995). Some other studies have investigated
only a few characteristics of culture or climate
(Chua, 2002; Lee, Kim, & Kim, 2006) and their
relationship to IC.
Jafari and Akhavan (2007) adopt a macro per-
spective to knowledge management by discussing
essential changes to be implemented on a national
level. The authors state that most knowledge manage-
ment activities are conducted on a voluntary basis
and are personal. A society must therefore foster a
culture of motivation, a sense of belonging, empow-
erment, and trust and respect so that such knowl-
edge exchanges can occur freely and frequently. In
contrast, at the organizational level Nazari et al., (in
press) investigated the relationship of three culture
variables, four climate variables, and two additional
organizational traits that could impact the level of IC
management processes and compared those culture,
climate, and organizational traits between Canada
and the Middle East. The authors observed strong
associations for the three components of IC (struc-
tural, human, and relational), and all variables. The
findings strongly point towards the importance that
the roles culture, climate, and traits play in relation
to IC management.
The current study builds on the findings of
Nazari, et al. (in press) by providing a comparative
analysis of Iran and Lebanon, two Middle Eastern
countries. The question that this chapter attempts
to address is whether organizations in these two
respective countries have appropriate cultures
and climates that will build on the foundation of
macro-level socioeconomic indicators for devel-
opment of IC assets within these organizations.
Although we are not attempting to investigate
national culture, we do call on that literature to help
determine what we might find at the organizational
level. We provide a comparative study of three
dimensions of organizational culture (tendency
toward cooperation; deference to power; and fear
of the unknown) and four dimensions of climate
(risk-taking, ownership; openness; and trust)
from data collected at the organizational level in
Lebanon and Iran.
National Intellectual Capital Stocks and Organizational Cultures
organizational Culture
and iC Management
Tendency Toward Cooperation
Development of IC assets, especially the knowl-
edge category, requires some degree of individu-
alism to spur creative ideas but also sufficient
tendency toward cooperation to share those ideas
with others in a give-and-take process of improv-
ing and making those ideas into a feasible prod-
uct. Without cooperation among employees, the
ideas may remain in the domain of an individual
employee’s mind rather than becoming an asset
of the organization, owned by the organization’s
employees in total.
The results of the GLOBE (Global Leadership
and Organizational Behaviour Effectiveness)
study (House, 2004), which examined 62 countries
including Iran and Lebanon, showed Arab societ-
ies scoring high on group and family collectivism
(Kabasakal & Bodur, 2002). In a study specific
to Lebanon, Jabbra (1989) found that Lebanese
place high emphasis on social conformity.
Iranian cultural practices show strong in-group
collectivism. Although initially this tendency
toward cooperation may seem beneficial, if too
strong, it may discount human reasoning and the
exercise of opinion in questions of law, leading
to less openness and transparency. Confirm-
ing the GLOBE study, Ali & Amirshahi (2002)
studied 768 managers in Iran, randomly selected
from state, private, and mixed organizations, and
found that the majority displayed a high tendency
toward collectivism and a weak commitment to
individualism (Ali & Amirshahi, 2002). A strong
emphasis on consensus may create an obstacle to
acceptance of new knowledge.
In Hofstede’s (1984) cross-cultural study of
work values Lebanon and Iran received scores that
were very similar. Iran received a score of 41 on
the Individualism/Collectivism dimension which
is very close to the score for the Arab countries
(Egypt, Iraq, Kuwait, Lebanon, Libya, Saudi
Arabia, and UAE) which was 38. However, the
data for this seminal work was collected in 1972,
and many of the Arab countries were grouped
together. Due to a lack of more current literature
providing a more direct comparison, it is likely
that in both Lebanon and Iran employees may
perceive similar levels of cooperation in their
organizations.
Deference to Power
Deference to power relates to the willingness of
employees to place higher value and respect on
decisions or ideas based on level of authority
over expertise. It respects an uneven distribution
of power in an organization and employees’ ac-
ceptance of this. Deference is paid to individuals
located further up in the hierarchy in organizations.
In contrast, weaker respect for authority, power, and
hierarchy intensifies communications (Chaminade
& Johanson, 2003) and provides a basis for more
participatory decision-making (Chow et al., 1999).
Deference to power within organizations could
act as an impediment to knowledge sharing and a
building of relationships, both important categories
of IC (Ardichvili et al., 2006; Chow et al., 1999).
Arab culture is characterized by large power
distance in comparison to the West In Hofstede’s
study of national cultures (1984), Lebanon was
grouped with Arab countries, which received a
score of 80 on this dimension. This would mean
that obedience to authority and control are reflected
in the Lebanese culture. The patriarchal nature of
the Lebanese society has important implications
for how people behave at work. Individuals’ out-
look toward work is affected by their decisions to
give up independence and submit to the father’s
rule at home (Sharabi, 1988). Most employees
would display little initiative to exercise indepen-
dent judgment and creative thinking and would
take comfort in simply following the suggestions
of their superiors.
The results of the GLOBE (Global Leadership
and Organizational Behaviour Effectiveness)
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 National Intellectual Capital Stocks and Organizational Cultures
study (House, 2004) showed Iranian culture to
be characterized by high power distance also. In
Hofstede’s (1984) original study Iran received
a score of 58. This indicates a culture in which
authority takes precedence over competency. The
recent developments in the country have had a
profound effect on the work environment in that
technocrats were replaced by ideologists and a
competent skilled workforce was replaced by a
loyal work force (Namazie & Frame, 2007). Man-
agers tend to put loyal and ideologically-sound
employees into key management and strategic
positions, regardless of knowledge and expertise,
which most likely is detrimental to IC develop-
ment. As both Lebanon and Iran tend to show high
deference to power, it is likely that employees in
organizations in their respective countries may
perceive similar levels of deference to power.
Fear of the Unknown
Fear of the unknown suggests that employees
feel threatened by uncertainty. In organizations
in which employees wish to avoid uncertainty,
there is greater observance of rules to lower risks
and promote stability and uniformity (Chaminade
& Johanson, 2003). In organizations in which
employees are comfortable with some degree of
uncertainty, there is greater tolerance and less rigid-
ity (George & Jones, 1999). Fear of the unknown
can impede the development and implementation
of new ideas, the sharing of knowledge, and the
strength of relationships.
On this characteristic it is difficult to find stud-
ies that would highlight differences in cultures
between Iran and Lebanon. However, it may be
said that the instability of the business environ-
ment in Iran has had the greatest impact on human
resource management in that country (Namazie &
Frame, 2007). The ever changing laws and regula-
tions and the complexity of Iranian labor laws has
caused many managers to be ever more selective
in their recruitment and selection procedures in
hiring new staff. As indicated earlier in this paper,
104
Iranian managers showed a preference for loyalty
over competence. These initiatives can be viewed
as steps taken to mitigate the negative effects of
the unknown.
Using the scores for uncertainty avoidance
in Hofstede’s (1984) study, we find that Iran and
Lebanon are similar when compared to Western
countries. Iran’s score was 59 while that for Leba-
non was 68. In both societies we would expect
employees to exhibit a preference for clear rules
and procedures in order to attain greater career
stability. They would tend to be more tolerant of
unfairness and more believing in absolute truths.
Therefore, employees in these countries would be
less open to experimentation with new or untested
initiatives and may perceive similar levels of fear
of the unknown.
organizational Climate
and iC Management
Because there is a scarcity of research on organi-
zational climate in general, and even less on the
Middle East, we provide a broad discussion on
climate comparing national characteristics of Iran
and Lebanon. Then, we frame this discussion with
a model by Golembiewski (1979), which includes
risk-taking, ownership of ideas, openness, and
trust, but first we explain the relationship between
culture and climate.
Few researchers draw a distinction between
organizational culture and climate and indeed
culture creates climate (Reichers & Schneider,
1990; Schein, 1988). However, because culture is
a more enduring organizational characteristic than
climate, we felt that MNCs wishing to develop
IC assets may find the distinction useful. MNCs
may more readily find changing the organizational
climate easier than the culture, as employees would
be more conscious of climate than culture. Culture
is defined as “a pattern of basic assumptions...”
(Schein, 1984, p. 3) and shared values, beliefs
(Sathe, 1985), ideologies (Beyer, 1981), attitudes
(Fishbein & Ajzen, 1975). In comparison, climate
National Intellectual Capital Stocks and Organizational Cultures
describes an organization’s personality (Forehand
& Vonhaller, 1964).
Regarding organizational climate in Leba-
non and Iran, Mikdashi (1999) used the KEYS
instrument developed by Amabile et al., (1996)
to evaluate various aspects of work environment
in Lebanese firms that affected creativity. The
instrument was administered to 300 Lebanese
managers working in different lines of business.
Finding solutions to problems requires employees
to have the freedom to break the rules (Nemeth,
1997), feel safe about their ideas (McGowan,
1996) and feel free to take risks because failure
is tolerated (Eisner, 1996). The study found that
most Lebanese managers were lacking in cre-
ativity and perceived creativity and challenging
work to be a unitary phenomenon. Dirani (2006)
also echoes the finding that Lebanese shy away
from exercising creative thinking. In terms of our
study, this would indicate a low incentive for risk-
taking, a reluctance to take ownership of ideas, a
lack of openness, and a high level of mistrust in
Lebanese firms.
The same analysis holds true for Iran. Ali and
Amirshahi (2002) argued that in public institutions
in Iran there was a centralization of power and au-
thority at the top. In the private sector he identified
lack of motivation, absence of participation and
centralization of management practices. Iranian
managers also show a high level of nepotism in
their hiring activities (Namazie & Frame, 2007).
This is because of the national culture emphasiz-
ing distrust of outsiders. The argument is that it is
easier to teach a loyal person new skills rather than
teaching loyalty to a competent individual.
In a study investigating the critical factors for
developing a knowledge management culture in
the Iran Aerospace Industries, Jafari and Akhavan
(2007) asserted that organizations in Iran have to
restructure their way of thinking which is deeply
rooted in tradition. IC measurement and manage-
ment as a major component of knowledge man-
agement initiatives takes on increased importance
in such industries. The authors suggested that
to achieve organizational competitiveness there
needs to be a change in culture and beliefs. This
is because openness and trust that are so essential
to knowledge management initiatives are lacking
in most organizations.
Risk-Taking
Within any organization, attempts to engage in
innovation are greatly affected by attitudes toward
risk-taking (Detert, Schroeder, & Mauriel, 2000).
Different organizations may show varying degrees
of acceptance of risk-taking (Lynn, 1999), and
varying degrees of tolerance of failure which is
important in knowledge creation (Leonard-Barton,
1995). Uncertainty avoidance hampers the creation
of new ideas and impedes attempts by organi-
zations to introduce IC management practices
(Chaminade & Johanson, 2003). Nazari et al., (in
press) demonstrated that more sophisticated IC
management systems were found in organizations
which encouraged calculated risk-taking.
Both Lebanon (as part of the Arab country
group) and Iran are characterized by Hofstede
(1984) as possessing high uncertainty avoidance
as a cultural characteristic compared to Western
societies. In such environments employees would
be risk averse. They would shy away from taking
initiatives to try new approaches or ideas in fear
of failure which might trigger the disapproval of
a superior. The desire to maintain job security and
achieve collective harmony would discourage
any step that might be perceived as threatening
the status quo. Therefore, in connection to IC
management processes we suggest Iranians and
Lebanese will perceive similar levels of perceived
risk-taking in their respective organizations.
Ownership of Ideas
Our discussion of this dimension is closely related
to risk-taking. All the factors that would hinder
risk-taking would also discourage employees from
taking pride in putting forward novel ideas. In a
105
 National Intellectual Capital Stocks and Organizational Cultures
study of an international engineering and con-
struction company, De Long and Fahey (2000)
concluded that after layoffs had occurred in the
company, engineers were less inclined to admit
making errors. DeLong and Fahey (2000) provide
evidence for the importance for employees to take
ownership of their ideas, have pride in their work,
and receive recognition for their contributions.
Nazari et al., (in press) found a strong relation-
ship between ownership of ideas and all three
categories (structural, human, and relational) of
IC management processes at the organizational
level, further supporting the importance of this
variable for the extraction of wealth from IC
assets. Without ownership of ideas, employees
would find few incentives for proposing ways
of improving performance and would be less
inclined to stand by such proposals and claim
them as their own. Therefore, in connection to
IC management we suggest that Iranians and
Lebanese will report similar levels of perceived
tendencies toward taking ownership of ideas in
their respective organizations.
Openness
Gold et al., (2001) emphasized the extreme
importance of interaction and dialogue among
employees as a factor in converting tacit knowl-
edge into explicit knowledge. These processes are
instrumental in transmitting knowledge and giving
birth to new ideas. Such an open culture is espe-
cially important with regard to IC management
(Lynn, 1999). In another study, Nazari et al., (in
press) found a high correlation between openness
and IC management processes, suggesting that a
climate characterized with openness will allow
organizations to better manage their IC assets for
wealth extraction.
In light of the general description and macro
indicators related to openness, we would expect
a low perception of openness in the organizations
in these two countries. Their cultural similarities
along Hofstede’s (cultural dimensions) would
106
indicate similar attitudes toward openness. There-
fore, in connection to IC management we suggest
that Iranians and Lebanese will report similar
levels of perceived openness in their respective
organizations.
Trust
Trust is essential in creating an environment among
employees that is conducive to the transmission of
knowledge from individuals into the firm’s best
practice archives, data bases, and other records
(De Long & Fahey, 2000, p. 120). Studies have
shown the importance of a relationship between
trust and sharing of knowledge within organiza-
tions (Alavi, Kayworth, & Leidner, 2005; Gold
et al., 2001) and in international settings. Nazari
et al., (in press) found that organizations with a
strong trust climate are more likely to have more
appropriate IC management processes for creating
wealth from IC stocks of assets.
Performance appraisal systems in Iranian firms
show a lack of clarity in setting performance
indicators and failure to measure indicators ob-
jectively. Employees show a high level of distrust
of managers because they believe there is much
favoritism and subjectivity in such appraisals. As
well, there is a high degree of nepotism in recruit-
ment practices and a high degree of ambiguity in
drafting of employment contracts and conducting
performance appraisals in Middle Eastern firms.
Managers are not seen to be investing in the de-
velopment of their subordinates. Furthermore,
Iran’s labor laws do not allow employees to
strike or bargain collectively. In fact, sometimes
employers have demanded prospective employees
to sign “blank contracts” in order to get jobs. The
employer later fills in the conditions of the con-
tract (Namazie & Frame, 2007). All these factors
contribute to a high level of distrust.
In a similar study that assesses the potential
of Iran’s software industry, Nicholson & Sahay
(2003) state that skepticism and mistrust that
are so prevalent in Iran may act as obstacles to
National Intellectual Capital Stocks and Organizational Cultures
the cross-fertilization of ideas among various
domestic organizations as well as hampering
collaboration with foreign companies. They find
evidence of a reluctance to engage in low level
data processing work that would facilitate trust
building. A factor that compounds this even further
is the current ideology that is driven by religion
and discourages experimentation with new ideas,
particularly from the outside.
Tayeb (2001) attributes the general level of
suspicion and mistrust amongst Iranians to the
historical upheavals that took Iran from a power-
ful empire builder to being occupied by the Allies
during World War II. Furthermore, during the
Shah’s time the country embraced Western values
and secularism only to reject all Western ideology
after the revolution and to be immersed by the
clergy in religious teachings. Although most of
the preceding discussion is about Iran, we could
find nothing that suggests that the level of trust
would be different in Lebanon. Therefore, Iranians
and Lebanese will likely perceive similar levels
of trust in their respective organizations.
In summary, the literature on socio-economic
macro-level indicators suggests that Lebanon has a
slightly better national foundation for development
of IC stocks of assets. In contrast, the literature
on organizational culture and climate suggests
that the two countries could be very similar. Con-
sequently, if organizational culture and climate
act as obstacles to IC management, we may find
that Lebanon has organizational IC management
processes similar to Iran due to the similarity in
their organizational cultures and climates.
Methodology
We used a questionnaire to gather data from
organizations in Lebanon and Iran for three ma-
jor constructs: intellectual capital management,
culture, and climate. To establish content validity,
subject matter experts pre-tested the instrument to
determine if each question captured the intended
domain. Each of these constructs was comprised
of a number of subscales. The Intellectual Capital
construct (19 items) consisted of three subscales
characterizing Structural Capital (five items), Hu-
man Capital (eight items), and Relational Capital
(six items). In harmony with the literature, the
combination of these three subscales portrays
the level of IC management processes desired
to keep and foster capabilities for competitive
advantage.
Organizational Culture had three subscales
which include Tendency toward Cooperation (five
items), Deference to Power (three items), and Fear
of the Unknown (three items). Organizational
Climate included subscales of Risk-Taking (two
items), Trust (three items), Openness (three items),
and Ownership of Ideas (three items).
We delivered the questionnaires to the MBA
students at two universities in Iran and Lebanon.
We also provided the MBA students with an online
link where their interested colleagues could fill out
the questionnaire electronically. The respondents
were asked to rank the items on five- point Likert-
type scale with the anchors 1 = strongly disagree,
2 = disagree, 3 = neither agree nor disagree, 4 =
agree and 5 = strongly agree. Some questions
were reverse scored to ensure that subjects moved
back and forth along the scale as they answered
questions. All surveys were in English as the
level of employee asked to complete the survey
in the Middle East had a sufficient command of
the English language.
Results
Similarity between demographic characteristics
enabled us to do cross-sample comparisons. Us-
ing list-wise deletion approach to eliminate the
cases with missing data left us with 61 cases (30
respondents from Iran and 31 respondents from
Lebanon- see table 2). The sample is deemed to
be sufficient to conduct statistical analysis.
107
 National Intellectual Capital Stocks and Organizational Cultures

Table 2. Demographic characteristics of Iranian and Lebanese samples

Demographic Characteristic Iran Lebanon

N= 30 N=31
Male 72% 62%
Female 28% 38%
Age 23-52 19-70
Upper level managers 10% 10%
Middle level managers 48% 24%
Lower level managers 24% 13%
Non-management (professionals) 18% 53%
Organization size 10-44,000 6-15,000
(full-time equivalent)
Functional Areas Engineering, consulting, Education, accounting, engineering,
operations, IT, finance, human marketing, human resource, consulting,
resource, accounting, marketing finance, business administration and
and academics. research and development.

Correlational Analyses differed in two samples (Iranian vs. Lebanese).

Due to exploratory nature of our work, we ran a
correlation analysis. Using pooled data from both
countries, we conducted bivariate correlation to
assess the strength and significance of the rela-
tionship between organizational characteristics
and IC constructs. All IC constructs (Structural,
Human, and Relational) were significantly and
positively correlated with one another. The cor-
relations among these dimensions were not high
enough to indicate collinearity (Structural with
Human r = .68, Structural with Relational r = .67,
and Human with Relational r = .73).
With regard to the relationship among three IC
constructs with culture and climate, we observed
that all three dimensions of IC (Structural, Hu-
man, and Relational) were significantly related to
all the dimensions of Organizational Culture and
Organizational Climate, (see Table 3).
ANOVA Results and Sample
Specific Descriptive Statistics
We conducted analysis of variance (ANOVA) to
determine the extent to which the study constructs
Summated scales were created using items for
each sub-scale. The intent was to determine if
differences occurred between Iran and Lebanon
across the constructs of IC management, culture,
and climate. Table 4 shows a summary of results
for each sample; no significant differences were
found.
Intellectual Capital: Using a summated scale
for the IC construct, the Iranian sample did not rate
the items significantly different (F (1, 61) =.732,
p =.396) from the Lebanese sample, indicating
a similar level of IC management in these two
samples. Furthermore, when the IC management
construct was separated into its three dimensions,
the differences in ratings were not significant for
structural capital (F (1, 61) =.878, p =.352), human
capital (F (1, 61) =.397, p =.531), relational capital
(F (1, 61) =.679, p =.413) (see Table 5)
Culture: When the subscales for the culture
construct were aggregated the difference was not
significant (F (1, 61) =1.769, p =.189). However,
individual analysis of the cultural constructs in-
dicated varied results. No differences were found
between the two countries on the tendency for
cooperation (F (1, 61) =.470, p =.496) or fear of

108
National Intellectual Capital Stocks and Organizational Cultures
Table 3. Correlations: IC management and organizational culture and climate
Concept and Dimension
Organizational Culture
Tendency toward Cooperation
Deference to Power
Fear of the Unknown
Organizational Climate
Risk-Taking
Ownership of Ideas
Openness
Trust
Notes:
* p < 0.05
** p < 0.01
unknown (F (1, 61) =1.708, p =.196). However,
we did find evidence that the organizational culture
in Lebanon is characterized by less deference to
power (F (1, 61) =11.417, p <.01) than in Iran.
(see Table 4 and 5).
Climate: When the subscales for the climate
construct were aggregated, the Iranian sample did
not rate the subscales significantly different (F (1,
61) =.007, p =.934) from the Lebanese sample.
When tested on separate constructs, the Iranian
sample did not rate risk taking, ownership, open-
ness, and trust significantly different (see Table
5) from the Lebanese sample.
ConClusions, iMPliCATions,
AnD FuTuRE REsEARCH
In today’s global village, MNCs are exploring
possibilities in untapped markets that are quite
different from their home countries. MNCs invest
in host countries to exploit valuable strategic
intangible assets. The competition for acquiring
and leveraging intangibles in untapped markets
relies on learning how to manage operations in
new environments (Kogut & Zander, 2003). This
knowledge cannot be gained without an under-
Intellectual Capital
Structural Human Relational
.49** .62** .65**
.32* .48** .42**
.34** .45** .40**
.67** .53** .68**
.52** .53** .56**
.42** .42** .56**
.57** .68** .73**
standing of the impact of different host country
characteristics on the strategic decisions. We
studied macro-level indicators and micro-level
characteristics that have been known to have
impacts on strategic management of IC.
For the macro-level indicators, we studied the
readiness to create wealth from IC asset stocks
using nationwide socioeconomic statistics. Leba-
non shows a higher degree of readiness to create
wealth from IC assets due it is higher GDP per
capita and greater percentage of service econo-
my. Lebanon also has higher levels of literacy
and school enrollment, availability of personal
computers and Internet use, and higher exports
and foreign direct investment when compared
to Iran. However, the opportunity does not play
out in the respondents’ perception that Lebanese
organizations employ IC management processes
to a greater extent than Iran.
Prior studies (Alavi et al., 2005; Nazari et al.,
in press) have emphasized the critical importance
organizational culture and climate in fostering
the management of IC. The significant statistical
results obtained from running correlation among
the organization’s culture/climate and all catego-
ries of IC management confirmed the results of
prior studies. The cultural constructs examined
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 National Intellectual Capital Stocks and Organizational Cultures

Table 4. Descriptive statistics: IC management, culture and climate

Variables Sample Mean Std Deviation N

Total IC (Summated Scale) Iran 54 11.697 30
Lebanon 56.613 12.137 31
Total 55.328 11.896 61
Structural Capital Iran 17.5 4.1 30
Lebanon 18.387 4.303 31
Total 17.951 4.193 61
Human Capital Iran 14.033 3.828 30
Lebanon 14.938 3.767 31
Total 14.5 3.793 61
Relational Capital Iran 22.467 5.538 30
Lebanon 23.313 5.025 31
Total 22.903 5.253 61
Culture (Summated Scale) Iran 30.733 6.633 30
Lebanon 28.452 6.762 31
Total 29.574 6.742 61
Culture- Tendency toward Cooperation Iran 12.7 3.659 30
Lebanon 13.355 3.8 31
Total 13.033 3.715 61
Culture -Deference to Power Iran 8.967 2.748 30
Lebanon 6.71 2.466 31
Total 7.82 2.826 61
Culture- Fear of Unknown Iran 9.067 1.999 30
Lebanon 8.387 2.06 31
Total 8.721 2.042 61
Climate (Summated Scale) Iran 31.379 7.243 30
Lebanon 31.226 7.07 31
Total 31.3 7.093 61
Climate- Risk Taking Iran 6.367 1.81 30
Lebanon 6 1.673 31
Total 6.18 1.737 61
Climate- Ownership of Ideas Iran 8.31 2.123 30
Lebanon 9.29 2.148 31
Total 8.817 2.175 61
Climate- Openness Iran 8.233 2.046 30
Lebanon 8.065 2.476 31
Total 8.148 2.257 61
Climate- Trust Iran 8.6 2.513 30
Lebanon 7.871 2.553 31
Total 8.23 2.539 61

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National Intellectual Capital Stocks and Organizational Cultures

Table 5. Tests of between-subjects effects for IC management, culture and climate (Iran vs. Lebanon)

df F Sig.
Total IC (Summated Scale) 1 0.732 0.396
Structural Capital 1 0.878 0.352
Human Capital 1 0.397 0.531
Relational Capital 1 0.679 0.413
Culture (Summated Scale) 1 1.769 0.189
Culture- Tendency toward Cooperation 1 0.47 0.496
Culture -Deference to Power 1 11.417 0.001
Culture- Fear of Unknown 1 1.708 0.196
Climate (Summated Scale) 1 0.007 0.934
Climate- Risk Taking 1 0.676 0.414
Climate- Ownership of Ideas 1 3.154 0.081
Climate- Openness 1 0.084 0.773
Climate- Trust 1 1.262 0.266

within a sample of Middle Eastern organizations
(tendency toward cooperation, deference to power,
fear of the unknown) are strongly associated with
three dimensions of IC management (structural,
human, and relational). Furthermore, the climate
constructs (risk-taking, openness, ownership, and
trust) had strong associations with the same three
dimensions of IC management.
Based on the existing literature, we suggest that
the difference in the IC management levels might
be due to organizational characteristics that act
as obstacles or initiatives for IC wealth creation.
The results of our comparative study revealed that
other than deference to power, all other cultural
and climate variables are not significantly distinct
in our two sample contexts. One possible conclu-
sion to be drawn from the results of our study is
on the importance of organizational (micro) level
characteristics in fostering IC management.
These findings are important to MNCs cur-
rently operating or planning to operate in these
two countries with high reliance on off-balance
sheet and intangible assets for the success of their
operations. Given that climate is a less enduring,
more observable characteristic (Denison, 1996),
our findings suggest that managers should attempt
to create a climate with positive characteristics
through incentives that promote risk-taking, open-
ness, trustfulness, and ownership of ideas.
Our study suffers from a small sample size
and a weak literature on which to build a theo-
retical foundation for our findings. Due to a lack
of availability of macro-level socio-economic
indicators and studies on organizational human
resource management in these two countries, it is
difficult to make rigorous scientific predictions.
Therefore, we encourage academics to conduct
similar studies in other developing countries,
which are attractive for foreign investment. Sev-
eral interesting research questions remain to be
investigated in future studies.
Most of the studies related to the role of culture
and climate in the development IC management
are theoretical. More studies need to be under-
taken to explore this interesting research area.
We only focused on two developing countries in
our study. Additional studies need to explore the
role of organizational and national IC stocks in
the organizational IC management processes in
other developing or developed countries.
Our study focused on the IC management
processes, and we did not study the role that the

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 National Intellectual Capital Stocks and Organizational Cultures
organizational characteristics might have in im-
proving the actual existence of IC in an organiza-
tion. Therefore, another fruitful area of research
would be to investigate how the improvement in
the IC management processes might lead to devel-
opment of IC stocks for organizations operating
in developing or developed countries.
Finally, the results of our study indicated that
managers can benefit from improving the orga-
nizational characteristics. However, the suitable
management control systems that would promote
these climates were not discussed in our study.
Future studies can investigate the incentive mecha-
nisms that should be put in place to promote such
an atmosphere.
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National Intellectual Capital Stocks and Organizational Cultures

APPEnDiX A

items used in the Questionnaire:

intellectual Capital - structural Capital

1) People have access to the information systems they need to fulfill organizational objectives.
2) Our organization possesses processes to develop fully its unique capabilities, skills, and knowl-
edge.
3) Features of our information systems capture the knowledge that exists in this organization.
4) Most co-workers/associates are familiar with organization information systems that assist job
performance.
5) We have good systems within our organization to measure the value of our knowledge.

intellectual Capital – Human Capital

1) The knowledge that each co-worker/associate has is not really appreciated until that person leaves
the organization.
2) Most co-workers/associates clearly understand “why” they do what they do in their jobs.
3) Extensive knowledge sharing occurs between experienced and new people in our organization.
4) Because knowledge is shared non-systematically (e.g. sporadically, informally), dependency on
a few key individuals for success is high.
5) Bureaucracy within our organization does not slow down the application of new ideas.
6) We are able to link the success of our organization to our knowledge and expertise.
7) We often develop techniques or processes based upon what we have learned from earlier experi-
ences.
8) It is easy to spread individual knowledge throughout this organization for others to use.

intellectual Capital – Relational Capital

1) We maintain appropriate communication with our stakeholders.

2) Suppliers and customers have a clear picture of who we are and what we offer.
3) Our clients believe that we work towards their best interests.
4) We emphasize getting to know one another in this organization.
5) Co-workers/associates generally confide in one another.
6) The structure within this organization promotes caring relationships.

organization Culture –Tendency toward Cooperation

1) Most people in this organization think that teamwork provides appropriate recognition.
2) People in this organization get ahead working on their own rather than in a team.
3) The most valuable people in this organization are team players.
4) Most members are willing to put team objectives ahead of personal objectives.
5) In this organization, common core values guide co-workers/associates in a unified direction.

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 National Intellectual Capital Stocks and Organizational Cultures

organization Culture – Deference to Power

1) Most members of this organization would feel comfortable disagreeing with their supervisors.
2) Employees are frequently asked to participate in our organization’s decision-making.
3) There is a willingness to allow anyone on the team to take the lead, based on who is most expe-
rienced.

organization Culture – Fear of the unknown

1) Mistakes are acceptable in this organization as long as we learn from them.

2) We are enthusiastic about taking on challenges in which we do not have complete information.
3) We are comfortable with uncertainty in our organization.

organization Climate – Risk-Taking

1) Taking reasonable risks is acceptable in this organization.

2) Tolerating mistakes when trying new ideas is accepted in this organization.

organization Climate - ownership of ideas

1) It is best not to take credit for your ideas in case they don’t work out.
2) People who offer innovative ideas really get ahead in this organization.
3) Expressing original ideas is encouraged in our organization.

organization Climate – openness

1) It is best not to tell others too much in this organization.

2) Constructive comment is well received among colleagues.
3) People are not reluctant to speak out when in meetings.

organization Climate – Trust

1) Employees trust that the organization is concerned about their welfare.

2) We follow through on what we say we will do in this organization.
3) Levels of trust among employees in this organization are generally high.

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 119

Chapter 7
A Knowledge Management
Framework to Manage
Intellectual Capital for
Corporate Sustainability
Herbert Robinson
London South Bank University, UK

ABsTRACT
The significant development in knowledge management (KM) literature in recent years is a reflection
of the growing interest to academics and practitioners/consultants involved in organisational change
and business transformation. Knowledge is a major source of competitive advantage and knowledge
assets/intellectual capital has to be managed effectively. The importance of implementing a knowledge
management strategy to understand the relationship between physical and intellectual capital, to in-
crease the market value of organisations and achieve corporate sustainability is examined. Using case
studies of construction organisations and applying the STEPS knowledge management framework, it
was found that there is a greater need for multinational organisations to implement KM. This is because
they have knowledge that is diverse and geographically dispersed across a network of organisations. It is
concluded that knowledge management has a catalytic role in developing intellectual capital to achieve
corporate sustainability. The STEPS framework will enable multinational organisations to identify the
reform, resource implications and the results of KM activities.

inTRoDuCTion tions. Knowledge is vital for business improvement

Knowledge is seen as a major source of competi-
tive advantage and managing knowledge assets or
intellectual capital is important. This is increasingly
recognised as crucial in many sectors, industries and
type of firms, particularly in multinational organisa-
DOI: 10.4018/978-1-60566-679-2.ch007
but “it is not the knowledge of the organisational
members per se which is of critical strategic im-
portance, it is the firm’s productivity in building,
integrating and utilising its intellectual capital which
is vital” (Jordan & Jones, 1997 p393).
Multinational organisations recognise the value
of knowledge assets as a source of wealth creation.
The need to bring knowledge assets to the centre

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
stage in formulating strategic business objectives
is critical in creating and maintaining a competi-
tive advantage. Demarest (1997 p383) noted that
‘firms without knowledge management systems
will be effectively unable to achieve the re-use
levels required by the business model implicit
in the markets they enter, and will lose market
share to those firms who do practice knowledge
management’. As multinational organisations
transform to global network organisations, they
face a number of challenges relating to their hu-
man resource policies and practices, strategy and
performance (Novicevic & Harvey, 2004). Human
capital and knowledge strategy such as advice and
knowledge sharing networks plays a pivotal role
in the transformation process and in knowledge
transfer across organisational boundaries and
borders. Knowledge management is therefore
important in multinational organisations because
of their global networks; and the difficulty to de-
termine ‘who knows what’ in such geographically
dispersed organisations (Robinson et al 2005a).
Whilst an increasing number of multinational
organisations now perceive managing knowledge
assets or intellectual capital as crucial, there are
major challenges associated with the implementa-
tion of knowledge management activities.
This chapter examines the importance of man-
aging knowledge assets and presents a knowledge
management framework to facilitate a structured
approach in developing intellectual capital for
corporate sustainability. The chapter starts by
exploring the relationship between knowledge
assets and business performance. The rationale
and business logic for managing knowledge assets
and measuring intellectual capital is explained.
The role of knowledge management in corpo-
rate sustainability, the concept of the STEPS
knowledge management maturity framework
and its application are discussed drawing on the
recent experiences of multinational construction
organisations. Organisational readiness to imple-
ment knowledge management such as identifying
the resources required, reform needed and the
120
results monitoring mechanism that underpins the
STEPS framework as well as future challenges
are also discussed.
KnoWlEDGE AssETs AnD
BusinEss PERFoRMAnCE
The traditional view is that business performance
is measured in terms of physical capital such as
buildings, plant and equipment. They remain es-
sential for the production of goods and services
and the capital required (debt and equity) for
financing business operations. Financial measures
are normally incorporated in conventional balance
sheets and accounting systems enabling managers
to provide information on how much a company
is worth in terms of cash in the bank, value of its
land, plant and buildings, working capital and
inventories. The dominance of financial indicators
in measuring business performance such as sales
and turnover, profit, market share, return on invest-
ment, and number of new customers is a reflection
of traditional business and accounting practices.
However, the emergence of the knowledge inten-
sive organisations such as professional services
firms in accounting, engineering, architecture,
surveying, law and management consulting has
seen intellectual capital replace physical capital.
Samuel DiPiazza Jr, Global Chief Executive
Officer of PricewaterhouseCoopers, and Robert
Eccles, former professor at Harvard Business
School, in their book titled ‘Building Public Trust:
The Future of Corporate Reporting’ recognised the
need for organisations to provide a broader range
of information than financial reporting regulations
require (DiPiazza & Eccles, 2002).
However, there is a need for better understand-
ing of how the key drivers of ‘soft’ knowledge
assets or intellectual capital influences financial
performance. This view is supported by many
academics and practitioners, hence the importance
of intellectual capital as a method for quantifying
the knowledge assets of an organisation and to
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
establish the link between knowledge and financial
performance. For example, Moustaghfir (2008)
argued that it is critical to understand the dynam-
ics of the knowledge value chain and how they
impact on business performance to effectively
manage these assets.
understanding the link Between
Knowledge Assets and Performance
Financial measures such as market share, sales
turnover and share prices are indicators partly
reflecting the business climate. But they are also
affected by knowledge assets such as business
processes, competence of staff and customer
relationships influencing business performance.
The knowledge assets include, for example,
the quality of leadership in an organisation and
board structures (e.g. composition of direc-
tors, number of directors serving on board or
its independence). It also focuses on customer
knowledge and related market intelligence such
as company brand, knowledge and creativity of
staff, efficiency of business processes and, flow
of new ideas and innovation from research and
development expenditure. Stewart (1997) argued
that an organisation’s innovation capacity depends
considerably on the knowledge of its staff, business
processes and customer relationships. The impact
of knowledge such as creativity and innovation on
profitability and business growth are beginning to
be recognised. For example, the value of patents
and intellectual property rights is increasingly
acknowledged, and therefore proactively man-
aged by multinational organisations investing
heavily in research and development (Chiu &
Chen, 2007). The value of a brand and its effects
are appreciated by the financial markets and are
often reflected in the valuation of a firm (Peppard
& Rylander, 2001). Ho & Williams (2003) also
detected an association between board features
and corporate performance. However, Khurana
(2003) questioned the inferences that can be drawn
from testing such association in the international
setting studied, given cultural barriers and other
factors can impact on multinational organisations.
There is, at least, some recognition of the value
of leadership, brand, patents, goodwill and other
knowledge assets of a business. This value is rea-
lised when a company is sold or bought for more
than its book value. For example, IBM paid $3.5
billion for Lotus which was seven times its book
value in 1995 (Jordan & Jones, 1997). Knowledge
assets or intellectual capital, complementing
traditional financial information, can provide
an explanation of the high market valuation of
some companies (Peppard & Rylander, 2001).
In other words the significant value added is due
to knowledge in business processes, staff and
customer relationships. As Stewart (1997 p55-
56) puts it ‘you don’t buy Microsoft because of
its software factories; the company doesn’t own
any. You buy its ability to write code, set standards
for personal-computing software, exploit the
value of its name and forge alliances with other
companies’. Reliance on ‘hard’ physical capital
without understanding the role of ‘soft’ knowledge
or intellectual capital as key business drivers can
therefore be misleading at best. At worst, it could
result in corporate failure.
Types of intellectual Capital
According to Roos (1998), intellectual capital
surfaced as a response to vaguely defined domain
of knowledge management and to address the
specific needs of companies. Hence, intellectual
capital is seen more as a practitioner created con-
cept (Bontis et al, 1999). Originally, intellectual
capital was seen as the sum of human and structural
capital (Roos, 1998), supplementary information
to financial information, non-financial capital
often seen as a debt item - not an asset (Edvins-
son, 1997). There is now a gradual refinement
and convergence of the terminology ‘intellectual
capital’ (Peppard & Rylander, 2001). In recent
academic literature, intellectual capital is defined
as comprising human capital, structural capital
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 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
and customer or relational capital, increasingly
recognised as knowledge assets. Human capital
is the tacit knowledge in people’s heads, acquired
mainly through education, training and experience.
Tacit knowledge is stored in individuals’ heads.
Examples of tacit knowledge include estimating
and tendering skills in construction acquired over
time through hands-on experience in preparing
bids for new projects and understanding of con-
struction tender markets. This type of knowledge
is experiential, judgmental, context-specific and
therefore difficult to codify and share. Structural
capital on the other hand is explicit knowledge,
codified or embedded in business processes such
as organisational manuals of procedures, brands,
patents and trade marks. Explicit knowledge is
stored as written documents or procedures. As this
type of knowledge is codifiable, it is reusable in
a consistent manner and therefore easier to share.
Examples of explicit knowledge in construction
include design codes of practice, performance
specifications, drawings in paper-based or
electronic format, and construction techniques.
Customer capital, sometimes called relational
or reputational capital, is the tacit and explicit
knowledge developed about an organisation’s
customer relationships, products and services,
marketing channels and market intelligence.
Organisational knowledge is therefore a mixture
of tacit and explicit knowledge.
New knowledge is created through the dy-
namic interaction of tacit and explicit knowledge
associated with people, processes and products
(services) created by the organisation (Nonaka
& Takeuchi, 1995).
As a result, there is a complex relationship
between the different forms of intellectual capital.
Structural capital influence or support the use
of human capital in an organisation. But it also
conditions how human capital is deployed and
codified as organisational knowledge. Structural
capital (the nature of business processes), influ-
ences the product (or brand), which in turn affects
customer capital (i.e. the type and number of
122
customers). Changes in customer capital could
signal the need for changes in the type of people
employed (human capital) and the business pro-
cesses (structural capital). The effect could be the
improvement of customer services in an attempt
to expand the customer base (customer capital).
Chang & Birkett (2004) noted that managing in-
tellectual capital creates a paradoxical challenge
for knowledge intensive organisations or profes-
sional services firms. This is due to the need for
innovation, on the one hand, requiring creative
processes (changes in structural capital) ‘to do
things differently’. On the other hand, there is a
need for profitability ‘by doing the same things
better’ through workforce productivity (changes
in human capital). Whilst creativity is important
in knowledge intensive organisations, Chang &
Birkett (2004) argued for a balanced between
creativity and productivity.
The Business logic for Measuring
and Managing intellectual Capital
Thomas Stewart (Stewart, 1997 p222), Editor
and Managing Director of the influential Harvard
Business Review, in his book titled ‘Intellectual
Capital - The New Wealth of Organisations’ argued
that ‘ if it would be a mistake to mingle measures of
intellectual capital with financial data; it would be
a greater one not to use them at all’. Garcia-Meca
& Martinez (2007) noted that in organisations with
high market-to-book value ratios, often seen as
knowledge intensive organisations; analysts tend
to incorporate more information on intellectual
capital to justify recommendations. They found
that an organisation’s profitability influences the
extent of intellectual capital information use and
concluded that the findings will have implications
for accounting and financial reporting policy.
Measuring intellectual capital is therefore im-
portant as ‘you cannot manage what you cannot
measure’. Intellectual capital provides a holistic
view of how to quantify knowledge assets of an
organisation and helps to create a framework of
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 1: Skandia’s Tree Metaphor
how knowledge assets and resources interact to
create value (Peppard & Rylander, 2001).
Skandia, a large Swedish insurance and fi-
nancial services company appointed a Director
of Intellectual Capital in the early 1990’s. It was
one of the first organisations to introduce an
intellectual capital report in 1994 to persuade
investors of the value of the organisation’s knowl-
edge (Edvinnson, 1997). Skandia argued that the
knowledge is the hidden assets of organisations,
which have to be nurtured like the roots of a tree
for long-term success and corporate sustainability.
The value creation concept showing the relation-
ship between financial and intellectual capital of
an organisation is illustrated by Skandia’s tree
metaphor in Figure 1.
If knowledge assets (or the roots of the tree)
are managed well, the ‘tree will bear fruits’ and the
market value of the company will exceed its book
value resulting in intellectual capital. However,
failure to manage knowledge assets (or the roots
of the tree) can result in the ‘tree collapsing’ or
intellectual liabilities, characterised by a situation
were the market value is less than the book value
of the organisation. Market value is sometimes
interpreted as the sum of financial capital and
intellectual capital in an organisation. However,
there is considerable debate on the nature of the
relationship. Understanding the key drivers in
knowledge intensive organisations and how it
affects market value is crucial. Improvement in
intellectual capital arises from, for example, posi-
tive leadership and staff changes (human capital)
and improvement in processes (structural capital)
resulting in new products and higher sales turnover
(customer capital). Outdated business processes/
products (structural capital) will lead to a drastic
reduction in customer base and deterioration in
customer relationship (customer capital). Changes
in share prices or market value of an organisation
is therefore as a result of changes in financial
capital (e.g. debt, equity, sale of assets, unsold
stocks etc) of the company and/or changes in
intellectual capital. Other companies around the
world such as Dow Chemicals, Canadian Imperial
Bank of Commerce, Hughes Space and Com-
123
 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
munications also adopted the intellectual capital
approach to understand the key drivers of value
creation in knowledge intensive firms (Peppard
& Rylander, 2001).
If knowledge assets are the roots of organi-
sations, then knowledge management is about
nurturing the roots to develop intellectual capital
for corporate success and sustainability. Bukh et
al (2001 p87) noted that the “relationship between
intellectual capital and knowledge management is
important because intellectual capital statements
report on the activities that management supports
in the name of knowledge management” and not
about knowledge which is a difficult and ambigu-
ous concept.
KnoWlEDGE MAnAGEMEnT FoR
CoRPoRATE susTAinABiliTY
Knowledge management (KM) is central to sus-
tainability as the way knowledge assets (human,
structural and customer capital) are managed,
alongside traditional physical capital or financial
assets, can lead to improve corporate governance.
Developments in sustainability reinforced the need
for a change in business logic, requiring organisa-
tions to simultaneously address traditional finan-
cial indicators and intellectual capital measures.
Intellectual capital relate to human, structural and
customer capital. But it could also capture the
sustainability dimensions of economic growth,
environmental quality and social equity.
Unlike financial or economic issues, some
environmental and social issues relating to hu-
man, structural and customer capital are some-
times perceived as difficult to measure. But this
is gradually changing. Investors, customers and
society are increasing the level of commitment
and support for organisations embracing the con-
cept of corporate sustainability (Knoepfel, 2001).
Developing intellectual capital to capture the
economic, social and environmental dimensions
therefore makes business sense particularly for
124
multinational organisations increasingly subjected
to global initiatives. Such initiatives include the
Global Reporting Initiative (GRI) for promoting
sustainability reports by capturing non-financial
information and the Dow Jones Sustainability
Group Index for ranking organisations according
to corporate sustainability performance. There are
other significant developments such as the SIGMA
Guidelines (2003) for embedding sustainability
principles within core business processes. This is
achieved by explicitly incorporating the dimen-
sions of human and social capital, alongside, other
types of capital to achieve the goals of sustain-
ability. The guidelines are supplemented by the
Environmental Accounting and Sustainability
Accounting toolkits to enable organisations to
translate sustainability principles into practice.
A knowledge management strategy is crucial
to incorporate the goals of sustainability as it
enables an organisation to unlock and leverage
intellectual capital to become a forward thinking
and learning organisation. The growing interest in
knowledge management has resulted in a ‘renewed
attention for the question of how to measure the
value of knowledge’ (Dekker & de Hoog, 2000;
Robinson et al, 2005b). There is also a shift from
the first wave of knowledge management with a
narrow focus to the second wave capturing a much
broader view of all knowledge resources. The idea
of knowledge management has moved to empha-
size the value of knowledge on an organisation’s
products and services (Mouritsen & Larsen, 2005).
Jennex and Olfman (2005 & 2006) developed a
useful framework and model for assessing suc-
cess in knowledge management and knowledge
management systems. Kujansivu (2008) argued
that intellectual capital management is still theo-
retical and managers do not know the most ap-
propriate approach to operationalise the concept
of intellectual capital. However, the difficulty for
many organisations is that the implementation of
knowledge management strategies and activities
to measure and develop intellectual capital has
often been ad hoc, without a coherent framework
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 2: Concept of KM maturity
and the steps required. There is a need for a more
structured approach to implement knowledge man-
agement for benchmarking progress, measuring
and managing intellectual capital.
sTEPs Framework: Five
steps to sustainability
The STEPS (Start-up, Take-off, Expand, Prog-
ress, and Sustain) maturity framework was devel-
oped to facilitate the management of knowledge
assets and measurement of intellectual capital. The
concept of the STEPS framework is illustrated
below (see Figure 2).
The vertical scale reflects key attributes of
knowledge management activities to develop
intellectual capital from low to high level. Low
level activities such as understanding the concept
of knowledge management and awareness of the
benefits are the dominant attributes at the start-up
stage. High level attributes, such as measurement
of intellectual capital and diffusion across business
sectors, units and networks of organisations in the
case of multinational enterprises, are associated
with the advanced stage. The attributes reflect
current themes in KM and organisational readiness
in terms of the reform required the resource impli-
cations and the availability of a result monitoring
system to review the impact of KM on intellectual
capital of the organisation. The horizontal scale
reflects ‘attribute dimensions’ from low to high
performance. For example, the dimensions for the
attribute ‘resources’ could vary from limited (low
performance) to sufficient (high performance), and
for ‘goals’ from vague (low performance) to more
specific and refined (high performance) as KM
implementation becomes more mature. Similarly,
the dimensions for attribute ‘awareness of benefits’
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 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 3: The STEPS Maturity Framework
is from preaching (low performance) to practice
and realisation (high performance), and for ‘dif-
fusion’ it is from localised in a business unit or
particular organisation, applied either vertically,
horizontally or diagonally in the business unit or
organisation (low performance) to widespread
application across all functions and business units
within the organisation or between a network of
organisations as in multinational enterprises (high
performance). The STEP maturity framework is
shown in Figure 3 and the five key steps associated
with it are discussed in detailed below.
Stage 1: Start-Up
Organisations at this stage are the least advanced,
characterised by a gradual understanding of the
concept of KM, and the evolution of different
perspectives. There will be an awareness of some
of the practical implications and an appreciation
126
of some of the benefits of KM, at least, in theory.
The goal of knowledge management (KM) or
the role of a knowledge manager is sometimes
misunderstood to be an information technology
manager or a librarian. A knowledge manager is
simply a facilitator or, using Skandia’s concept
of a tree metaphor, a ‘gardener’ to nurture the
roots of organisational knowledge to develop
intellectual capital. There is clearly a difference
between knowledge and information management.
As Malhotra (2000 p11) explained ‘this strategic
difference is not a matter of semantics; rather, it
has critical implications for managing and surviv-
ing in an economy of information overabundance
and information overload’. There has to be some
recognition at this stage of the potential of KM
in building the value of knowledge assets and
developing intellectual capital.
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability

Table 1: Knowledge management tools

Establishing leadership, identifying resources
KM techniques KM technologies for external support and consultancy is essential.
Key characteristics – focus on Key characteristics – focus on
Identifying barriers and risks associated with the
tacit knowledge of people and explicit knowledge and requires development of the knowledge management strat-
require strategies for learning. IT infrastructure and skills.
The goal is to link people so The goal is to connect people
egy is also crucial at this stage. Dent & Montague
that tacit knowledge is shared. with explicit knowledge. The (2004) suggested that it is better to scrutinise,
The emphasis is on creating emphasis is on creating IT net- review and celebrate success rather than develop
people sharing networks within works to facilitate codification
and between a network of and knowledge sharing within specific KM measurement at the early stage. They
organisations in multinational and between a network of foresee a need for more detailed measures when
enterprises. organisations in multinational
enterprises. KM activity matures during the expansion and
Examples are: Brainstorming, Examples are: Intranets/Ex- subsequent stages.
Communities of Practice, Post- tranets, Groupware, Expert
Project Reviews, Recruitment Systems, CAD/Virtual Real-
and Training ity Systems, Data and Text Stage 3: Expansion
Mining
This stage is characterised by increasing scale and
application of KM initiatives. It involves rolling
Stage 2: Take-off out KM strategy to other business units, projects
and offices. KM can be expanded either horizon-
The take-off stage involves establishing the goals tally, vertically or diagonally with performance
of KM and exploring the strategic options for measures to evaluate KM activities and specific
implementation. It is important to develop a KM measures for intellectual capital. There will also
strategy with a working definition to facilitate be a further strengthening of the KM team, better
consensus. However, experimentation with KM integration of KM activities with specific business
on an ad hoc basis, localised or very small scale objectives to increase both the visibility of the
will be required to refine the strategy. The KM strategy, the team and its leadership. The role of
strategy could be demand driven (delivered in real knowledge manager and the team should be com-
time where and when it is needed) or supply driven municated not only to facilitate knowledge shar-
(available in a central repository). It could focus ing but to dispel fears sometimes associated with
on people interactions (personalisation strategy) KM such as job insecurity. KM strategies should
with IT providing a supporting role. At the other be fully resourced in terms of dedicated teams, a
extreme, it could be a codification or computeri- budget and an infrastructure to support the leader-
sation strategy where IT plays the dominant role. ship and expansion programme. Change manage-
However, in practice the strategy is likely to be ment programmes are required to deal with major
a mixture of both personalisation and comput- barriers such as culture. Organisational culture is
erisation to manage tacit and explicit knowledge one of the most crucial factors contributing to the
more effectively. Table 1 shows various KM tools success of a KM project, and ‘perhaps the most
(techniques and technologies) used to implement difficult constraint that knowledge managers must
knowledge management strategy. The selection of deal with’ (Davenport et al, 1997 p14-15). KM is
the most appropriate tools will depend on important not only a technical problem involving the use of
dimensions such as type of knowledge, business IT but a socio-cultural one involving motivating
goals, knowledge transfer requirements between people to contribute knowledge for organisational
groups and individuals, different organisations or use (Marshall & Sapsed, 2000). There is therefore
a network of the same organisation. a need to proactively tackle organisational culture,
and associated barriers such as people’s fears, at-

127
 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
titudes or resistance to knowledge sharing. The
choice of KM tools to support specific initiatives
is important. An increasing amount of corporate
knowledge is available on Intranets and other
information technology systems. However, there
is widespread evidence that most organisational
knowledge is in people’s heads and processes.
Information technologies are not capable of cap-
turing some tacit knowledge without losing its
context. However, there is a powerful symbiotic
relationship between knowledge, and the use of
information technology to enhance the knowledge
management strategy (American Productivity and
Quality Center, 1997).
Stage 4: Progressive
Proper alignment of knowledge management ac-
tivities to strategic business objectives and specific
measures for intellectual capital is crucial. This
enables the justification of KM initiatives and to
demonstrate the impact on business or financial
performance. The progressive stage is therefore
characterised by integrating knowledge manage-
ment activities (KM) activities to strategic busi-
ness and measurement frameworks such as the
Balanced Scorecard (Kaplan & Norton, 1996) and
the Excellence Model (European Foundation of
Quality Management, 1999). The benefits can be
communicated by widespread publication of intel-
lectual capital reports alongside traditional balance
sheets and profit and loss reports. Introducing
incentive schemes to strengthen KM activities and
to facilitate implementation is crucial. However,
financial reward systems are difficult to put into
operations. As one Chief Knowledge Officer put
it ‘the real things in KM are the soft rewards, feel-
ing good about being contacted or appreciated by
colleagues as an expert’. This view is supported
by Sheehan (2000) who argued that peer acclaim
is more likely to be successful. Imposing incen-
tive schemes for knowledge sharing may, at best,
be difficult to monitor and, at worst, be seen as
divisive. It may even be wasteful leading to what
128
Lawton (2000) described as the ‘development of
knowledge landfills’.
Stage 5: Sustainability
At the sustainable stage, KM is institutionalised,
characterised by KM activities becoming aligned
to business objectives and specific measures of
intellectual capital. KM practices will be diffused
in the entire organisation. It will also become
embedded in organisational culture, employees’
behaviour, business processes, product develop-
ment and in dealing with customers. This final
stage is also characterised by widespread report-
ing on the performance of knowledge assets or
intellectual capital statements to support corporate
sustainability. Table 2 shows some measurement
tools used to evaluate knowledge management
activities to support intellectual capital reporting.
There is no universal standard for measuring or
evaluating knowledge assets and/or knowledge
management programmes (Robinson et al, 2005b).
However, two distinct aspects of knowledge man-
agement are often measured. The first relates to
knowledge assets (stocks). The knowledge stocks
are, for example, leadership and talents of people
employed (human capital), the efficiency of the
processes used (structural capital), the nature of
products and customer relationships (customer
capital). The second relates to knowledge manage-
ment projects, programmes or initiatives (flow)
aimed at improving or increasing the value of
knowledge assets (stocks). Failure to embark
on appropriate KM projects could decrease the
value of knowledge assets (stocks of intellectual
capital). For example, the absence of knowledge
sharing networks could create difficulties in updat-
ing staff knowledge. People may not be able to
understand new business processes or changing
client requirements. The consequences will be
a depletion or reduction of intellectual capital.
Choosing an appropriate tool for measurement is
crucial in assessing the effectiveness and efficiency
of knowledge management programmes and the
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Table 2: Examples of Measurement Tools used for Knowledge Management or Intellectual Capital
Type of Tool Brief Description/Focus
of Tool
Skandia Navi- Five areas; financial, cus-
gator tomer, process, renewal and
development, and human
capital with metrics for
each area
Intangible As- Three families of intangible
sets Monitor assets: external structure,
internal structure and indi-
vidual competence
Intellectual Consolidate different indica-
Capital Index tors into a single index and
correlate the changes in IC
with changes in the market
KM Benefits Relates knowledge benefits
Tree Approach to organisational benefits
Degussa-Huls Relates KM initiatives to
Approach transfer effects and suc-
cesses based on six dimen-
sions (people, management,
processes, technology, in-
novation, customers and
market)
IMPaKT As- Relates KM initiatives to per-
sessor formance metrics, strategic
objectives and provides for
quantification of value
Market-to- Based on the concept that in-
book value tellectual capital can explain
ratio the difference between the
value assigned by the stock
market and its book value.
Adapted from Robinson et al (2005b)
value of intellectual capital (knowledge stocks).
Application and Discussions
The STEPS maturity framework was used to assess
the maturity of eight construction organisations.
Figure 4 shows the position of the organisations
in the KM maturity scale. The black ovals indicate
ratings based on the interviewees’ perception of
the current positions of their companies. The white
ovals show the research team’s objective assess-
Links to Application Area Advantages and/or limitations
Strategic
Knowledge KM
Objectives
Assets initiatives
(Stocks) (Flows)
Strong X Easy to implement but using too many mea-
sures can make it confusing. Does not deal
explicitly with the quantification of the value
and benefits of KM
Strong X Easy to implement but using too many mea-
sures can make it confusing. Does not deal
explicitly with the quantification of the value
and benefits of KM
Strong X Easy to implement but problems with ob-
taining standardised metrics and industry
benchmarking
Strong X Focussed on three levels of benefits: knowledge,
intermediate and organisational benefits
Strong X X Focussed on the impact of key measures and
provide an assessment of the impact on busi-
ness results.
Strong X X Focussed only on measures related to strategic
objectives and provides an assessment of the
impact on key measures and business. Also
facilitate the diagnostic of KM problems and
the development of KM initiatives
Weak X Provides a very good overall indicator of value
subject to stock market volatility. Limited infor-
mation for developing strategies on knowledge
assets and knowledge management
ment of the relative positions of the organisations
following the studies.
The researchers’ ratings are based on the analy-
sis of key attributes using the STEPS maturity
framework. Within each stage, ratings were used
to indicate whether the characteristics are partially
evident or fully evident. The assessment show
that four organisations have over-estimated their
level of maturity and one has under-estimated it.
The remaining three made a reasonably accurate
estimate. The case studies further illustrate that
129
 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 4: KM Maturity Levels of case study organisations
construction organisations are at various levels of
maturity in implementing KM. One organisation
is at the expansion stage and has made reason-
able good progress. Two are at the take-off stage
and have made limited to modest progress, and
the others are at the start-up stage. All four case
study organisations (A, C, E and H) leading in
the maturity scale are multinational companies
that are knowledge intensive organisations with
significant presence in other parts of the world. The
remaining four, (B, D, F and G), are all national,
UK-based companies at the start-up stage. The
UK-based companies are exploring KM, without
a strategy, resources and a dedicated leadership.
The findings confirm that there is a greater need
for multinational organisations to implement KM
as they have a significant amount of knowledge
that is more diverse and geographically dispersed.
However, none of the organisations have a co-
herent structure for knowledge management in
terms of the relationships between people (hu-
man capital), processes (structural capital) and
products (customer capital). Understanding the
dynamics between knowledge assets is crucial
for the long-term development of intellectual
capital reports.
130
The initial focus of the work reported on the
STEPS knowledge management maturity frame-
work was based on analysis from construction
organisations (Robinson et al, 2006). However,
the framework is applicable to other business or
industrial sectors. The knowledge management
framework can be used as a tool to identify weak-
nesses and to develop an action plan with appro-
priate measures to facilitate the implementation
of knowledge management. This will therefore
facilitate the development of appropriate mea-
sures for intellectual capital to achieve corporate
sustainability. More significantly, the framework
will enable organisations to assess their readiness
to implement knowledge management. Organi-
sational readiness assessment is critical as it will
help to identify the reform necessary, the resources
needed to support KM and the monitoring system to
evaluate the results of KM activities. Depending on
the positions of organisations, action plans reflect-
ing various gaps in reform, resources and results
monitoring systems required, could be developed
to improve KM implementation. Organisations are
more likely to realise the full potential of KM if
the five steps to sustainability are translated into
action plans necessary to successfully implement
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 5: Sustainability Agenda for Construction Organisations
KM incrementally and develop the intellectual
capital of an organisation.
FuTuRE CHAllEnGEs
Corporate sustainability is a key issue for many sec-
tors and industries, particularly in the construction
industry. A survey of the top 100 companies shows
that the construction and building materials sector
is one of the worst with 9% producing separate
non-financial reports, significantly lower than the
average of 23% (KPMG International, 2003). The
figures for other sectors are 50% for utilities, oil
and gas (38%), pharmaceuticals (30%) electronics
and computers (25%) and retail (15%). Knowledge
management strategy can help in producing intel-
lectual capital reports by capturing non-financial
information to improve corporate sustainability.
But there has to be a clear sustainability agenda
to underpin KM implementation. Figure 5 shows
some of the factors considered or the sustainability
agenda for construction organisations in implement-
ing a KM strategy and to develop their intellectual
capital for corporate sustainability.
Sustainability is not only about environmental
damage limitation but improving understanding
and the responsiveness to investors, employees
and customer needs to develop an organisation’s
intellectual capital. The benefits for multinational
construction organisations includes improved
access to global clients, better bid/win ratio, in-
creased value of investment from ‘green’ clients,
improved human development though higher staff
retention and lower staff turnover or absenteeism.
This could also facilitate the improvement of
construction and business practices through reduc-
tion in carbon emissions, better health and safety
regimes to reduce the high risks often associated
with dirty and dangerous construction sites. The
overall effects will be significant in terms of repeat
clients and business due to regulatory compliance
including corporate social responsibilities. Cost
savings from avoiding high levels of rework,
defects and wastage, and potential revenue gains
will be achieved from an improved public and
global profile.
Multinational organisations need to focus on
(1) the development of appropriate sustainability
objectives for both local and international con-
131
 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
struction projects to reflect differences in country
situation or context, (2) assessing the implications
for knowledge management strategy (3) deter-
mine how sustainability objectives can be linked
to knowledge assets or various dimensions of
intellectual capital (human capital, structural and
customer measures) and (4) appropriate measures
should be selected. For example, designing out
waste is a major issue for many construction firms.
However, using ‘number of skips’ as a measure
of wastage may inform the finance/accounting
department about the level of waste in monetary
terms but such information is of limited use to
the environmental department and the environ-
mentally conscious clients. This is because it is
important to understand the nature and origin of
waste – i.e. composition by type of materials,
void space, causes of waste, etc. Understanding
the nature of the problem will enable the develop-
ment of an appropriate knowledge management
strategy for waste reduction. As a result, it will
improve the environmental image or intellectual
capital of the company. High level of wastage
could affect the image or how a construction
company is perceived by its customers, both
local and global clients as well as society. Nega-
tive image could have significant consequences
leading to a reduction in business opportunities.
However, a positive corporate image will result
in more prestigious projects, loyalty and brand
value, with significant improvement on financial
performance. Bringing sustainability to the fore-
front of an organisation’s business and knowledge
management strategy, particularly multinational
organisations will therefore, have a significant
impact on future wealth creation.
ConClusion
This chapter has demonstrated the importance of
knowledge management by establishing the rela-
tionship between knowledge assets and business
performance. The rationale for measuring (and
132
managing) intellectual capital and the catalytic
role of knowledge management in the process
is explained. Both the principles of knowledge
management and corporate sustainability have
resulted in a fundamental shift in business logic.
This requires multinational organisations to simul-
taneously address environmental and social issues,
alongside traditional financial and economic issues
within a knowledge management and intellectual
capital framework.
Developing a knowledge management strat-
egy is central to understanding the link between
knowledge and business performance. This
facilitates an understanding of the way knowl-
edge assets are managed and how it is related
to intellectual capital. The STEPS knowledge
management framework presented is a structured
approach to determine the steps involved and
the actions required to implement a successful
knowledge management strategy. It also enables
benchmarking implementation efforts and to
develop intellectual capital necessary to achieve
the goals of corporate sustainability. Multinational
organisations are expected to embrace the concept
of sustainability and to apply its principles as a
way of doing business.
Success in knowledge management is crucial in
developing intellectual capital which could lead to
improved corporate governance, business processes
and products. It could also result in increased market
value and enhanced customer/stakeholder value.
However, managing intellectual capital remains a
major challenge for multinational organisations.
There are substantial benefits associated with KM,
which includes enabling organisations to assess the
impact of knowledge management activities on
their knowledge stocks and flows. KM also help to
identify competencies and knowledge gaps, learn
from the corporate memory and share best practices
within an organisation or a network of organisa-
tions to improve business processes, products and
services. This is essential if multinational organisa-
tions are to remain dynamic and innovative in the
global market place.
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
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136

Chapter 8
An Overview of International
Intellectual Capital (IC) Models
and Applicable Guidelines
Tomás M. Bañegil Palacios
University of Extremadura, Spain

Ramón Sanguino Galván

University of Extremadura, Spain

ABsTRACT
In line with the increasing importance of the intangible economy within the last few years, a higher
number of models have been published. In this sense, the authors main original contribution when
measuring Intellectual Capital is related to comparing and assessing the different existent Guidelines,
unlike previous published papers.The purpose of this chapter is to present and compare some of the most
recent and significant contributions from researchers to the field of the measurement and management
of intangibles.

inTRoDuCTion generally accepted models for measuring Intel-

Intangible assets comprise one of the principal fac-
tors in the current and future success of organiza-
tions. The multidisciplinary character of this work is
demonstrated by the fact that an increasing number
of specialists, such as sociologists, psychologists,
economists, philosophers, intellectuals and profes-
sionals, are working in these questions.
At the same time, attention has been drawn to
the growing importance of the intangible Economy
by the publication of a growing number of models.
Nevertheless, we have observed that there are no
DOI: 10.4018/978-1-60566-679-2.ch008
lectual Capital in organizations. In recent years,
several have been proposed, with a number of
similar aspects, but differing with regard to their
complexity and adaptability.
Knowledge Management is a very recent man-
agement tool, which, although it has been greatly
discussed in the business world, still does not have a
significant number of organizations with a formally
implanted management program.
The results of different studies carried out by
consultants, university researchers and innovative
companies have materialized in different guidelines
for classifying, measuring and reporting on intan-
gibles. Nevertheless, considerable confusion still

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
exists between the concepts used, the practices
recommended and the final Intellectual Capital
Reports obtained.
All these studies follow the line of introduc-
ing supplementary information, external to the
company’s financial condition, basically a new
“information layer” using “narrative reports”. The
concept of “value reporting” effectively follows
the line of complementing the traditional annual
statement of accounts (balance sheet, profit and
loss account and management report) with in-
formation on intangible assets and non-financial
indicators.
Our main objectives in this research consist
on
• Performing a comparative study among
well-known IC models and
• Presenting most significant international
guidelines which contributed to develop
such models.
BACKGRounD
In an effort to find instruments capable of “captur-
ing” the real value of a company, many academics
and professionals have started to develop models
and measurements to quantify and visualize in-
tangibles, directing their attention in particular
to a new type of report called Intellectual Capi-
tal Reports (also known as Intellectual Capital
Statement).
Considering the different studies and analyses
that have been carried out in the past decade and
taking into account the lack of an adequate busi-
ness practice, launching generalised models for
the implementation of Knowledge Management
systems and the Measurement and Management
of Intangibles in the business world (Intellectual
Capital) seems premature.
According to the MERITUM Project (2002),
there isn’t actually an internationally accepted
frame of reference for the identification, measure-
ment and diffusion of information on intangibles
that determine the value of organisations, instera
just some isolated efforts in different parts of the
world. In the light of this fact, it would appear
opportune to dedicate effort to the development
of general guidelines that would make it easier
for companies to identify, measure and follow-up
their intangibles.
The International Community should ensure
that the process of elaboration and diffusion of
intangible assets produces homogeneous and
comparable reports and that, as a result, these
be useful for estimating future profits, the risk
associated with investments, etc.
In the moment we are at, we can consider that
the fairly complex task of acquisition, production,
use, diffusion and measurement of knowledge is
essential. According to Carter (1996), although
various attempts have been made to measure
knowledge, both at a microeconomic and a macro-
economic level, there is still a long way to go.
The inclusion, in their annual accounts, of
capital sums invested in intangible elements
decreases the results announced by companies.
This is the reason why certain professional sectors
(managers, analysts, consultants,…) are reticent
to invest in intangibles, even though they affirm
that they contribute to the creation of value.
In recent years, different associations and com-
panies have made great advances in the identifica-
tion, measurement, management and diffusion of
their intangibles; even if the criteria adopted for
this process have been, in the majority of cases,
heterogeneous and, as a consequence, the results
obtained difficult to compare and/or verify.
For all the foregoing, we understand that it
is necessary to have a commonly accepted in-
ternational frame of reference, which provides
companies with a basis for the identification
and measurement of their intangibles. These
Guidelines will not constitute a proposal for the
modification of accounting rules.
According to the OECD (1999), changes in
accounting rules may be necessary in the future
137
 An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
but, for the moment, all the efforts concentrated
on the measurement and publication of informa-
tion, should be subject to testing and applied
voluntarily.
As it turns out, in the depths of the OECD
a certain consensus has been established that,
little by little, steps should be taken in the de-
velopment of voluntary Guidelines to measure,
report on and manage intangibles. The European
Commission has also commenced a process,
similar to the preceding, based on the idea that
the key to future competitiveness and wellbeing
lies in increasing the knowledge base shared by
European citizens.
In this regard, Chaminade and Johanson (2002)
have summarised the conclusions of the confer-
ence held by the European Commission in Växjö
in March 2001, in the following way:
• There still does not exist a commonly ac-
cepted conceptual frame of reference to
understand, measure and report on intan-
gibles. This means that the coordination
and “fertilization” of initiatives between
countries from different parts of Europe
is very complex (and due to the grow-
ing importance of intangibles, the need
for a useful, understandable and com-
monly accepted conceptual framework -or
Guideline- seems urgent).
• The policies of government agencies, the
initiatives of the European Union, as well
as the possibility of incorporating organi-
sations from different sectors, is the cru-
cial starting point to initiate a Project and
for the acceptation and diffusion of the
methodologies.
• Although there is no consensus over how to
structure the important questions and that it
is not possible to develop a serious and ade-
quate empirical study without the necessary
(financial) support, this does not mean that
there is not a real interest in the question of
intangibles in the business world.
138
Nevertheless, and despite all the reasons
already expressed, there are countries that have
not developed their own Guidelines (or have not
participated as members of the research team of
a European project).
intellectual Capital Models
Next we will make an overview of the main inputs
in the last years, in theorist and practical ways.
Following table 1 and having in mind the
temporal evolution, we can say that there are
three different steps:
• In the first step, which refers from the
first works until 1998, the investigations
were centered in making definitions, clas-
sifications, establishing the different com-
ponents of the Intellectual Capital and
develop methodologies in a theorist way
which have to be then empirically refuted.
It is develop an important and diverse con-
ceptual frame with some consensus relat-
ing to Intellectual Capital components2.
In this step we highlight the pioneer mod-
els of Kaplan and Norton, Edvinsson and
Malone, Sveiby and Bontis.3
• In the second step, which comes from 1999
until 2001, the investigators are dedicated,
mainly, to make a review of the existent lit-
erature with comparison models, establish-
ing synergies and differences. Also, empir-
ic studies are made which try to validated
the before established models proving the
relations between the Intellectual Capital
and the value creation in a company.
• Finally, the publications from 2002 until
today reflect a new step in which the mod-
els are being improved and adapted to the
reality of the organizations, in which they
are starting to be implemented (financial
entities, services companies, insurance
companies, knowledge intensive enterpris-
es, public administration, etc.)
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines

Table 1. Relevant investigations in Intellectual Capital

Macro
Definition Literature Empirical
Conceptual Indicators Measurements
and Revision Study
Development
Kaplan and Norton (1992) X
Petrash (1996) X X
Brooking (1996) X
Edvinsson (1997) X
Edvinsson and Malone (1997) X X
Ross et al (1997) X
Sveiby (1998) X
Bontis (1998) X X
Cañibano et al (1999) X
Bornemann et al (1999) X X
Backhuijs et al (1999) X X
Westphalen (1999) X X
Andriessen et al (1999) X X
Hoogedoorn et al (1999) X X
Guthrie et al (1999) X X
Petty and Guthrie (2000) X
Bontis et al (2000) X X X
Mouritsen et al (2001) X X
Viedma (2001) X X
Ordóñez (2002) X X X
Seetharaman et al (2002) X X
Serrano et al (2003) X X X
Marr et al (2003) X X
Bueno et al (2003) X X X X
Source: Own work1

The Guidelines taking into account the lack of an adequate busi-

We shall specifically seek to justify the need for
general guidelines that provide an adequate refer-
ence framework for companies and organization’s
interested in developing systems of Knowledge
Management and the Measurement of Intellectual
Capital. To this end, a comparative analysis of the
most rigorous efforts developed in recent years
has been carried out.
Considering the different studies and analyses
that have been carried out in the past decade and
ness practice, launching generalized models for
the implementation of Knowledge Management
systems and the Measurement and Management
of Intangibles in the business world (Intellectual
Capital) seems premature.
There isn’t actually an internationally accepted
frame of reference for the identification, measure-
ment and diffusion of information on intangibles
that determine the value of organizations, instead
just some isolated efforts in different parts of the
world. In the light of this fact, it would appear

139
 An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
opportune to dedicate effort to the development
of general guidelines that would make it easier
for companies to identify, measure and follow-up
their intangibles.
Comparisons between
European Guidelines
Due to the growth of the Intangible Economy, a
growing number of Guidelines, Recommenda-
tions, and similar documents dealing with report-
ing on intangibles and the state of Intellectual
Capital have been published in recent years. There
has even been an element of competition between
them (Del Bello, 2002).
Guimón (2002) agrees that this type of docu-
ment (Guidelines) consists of a series of recom-
mendations, directed towards company directors,
on how to manage and report on Intellectual
Capital. At a business level, empirical studies show
that innovative companies are more financially
robust and generate more employment. The key
to the continuity of a company is the successful
management of its Intellectual Capital.
1. Presentation of the Guidelines
The comparative study of the various Guidelines,
to which we have been referring, will concentrate
on the most important European ones, those with
prestige both in the scientific world as well as in
professional and business sectors.
The first Guideline is one of the main results
of the MERITUM Project (Measuring Intangibles
to Understand and Improve Innovation Manage-
ment). “Guidelines for the Management and Dif-
fusion of Information on Intangibles (Intellectual
Capital Report)”, is the final document published
in January 2002, which gathers up the principal
conclusions of the three-year study.
The second Guideline we analyzed is the
result of close cooperation between researchers,
140
companies, organizations, consultancies and of-
ficial organisms in Denmark. It was financed by
the Danish Agency for Trade and Industry (from
now on Guidelines DATI4).
The third Guideline is the principal outcome
of NORDIKA (Nordic Project for measuring
Intellectual Capital), an Intellectual Capital
project initiated by the Nordic Industrial Fund,
in collaboration with a Commission set up by the
countries involved and a Round Table or Expert
Panel formed by professional and business asso-
ciations in the Nordic countries (Finland, Iceland,
Norway, Sweden and Denmark).
The analysis was carried out on two levels.
Firstly, a study was made of the manner in which
the Guidelines were developed and the end result
of the research. The following elements were
considered (Bañegil and Sanguino, 2007):
1. Terminology employed
2. Conceptual framework adopted
3. Objectives sought in the development of the
Guidelines
4. Research methodology
The second level of the analysis related to the
recommendations incorporated into each Guide-
line for the elaboration of Intellectual Capital
Reports by companies, taking into account the
following aspects:
1. Practices used in its development (Who is
going to carry it out?)
2. Procedures for implementation (How is it
going to be carried out?)
3. Recommendations for the structure of the
proposed Intellectual Capital Report (What
will the result be?)
4. Character of the proposed Indicators (What
instruments will be used for measuring?)
5. Users of the Intellectual Capital Report (To
whom is it directed?)
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines

Table 2. Summary of the first level of the analysis

Terminology and Conceptual

Framework
“Intellectual Capital Report”
MERITUM There is no definition of
knowledge
“Intellectual Capital State-
DATI ment”
Knowledge in action
“Intellectual Capital Report”
NORDIKA
Knowledge as a flow not stock
Source: own work
Objectives
Points of connection between
resources and critical activi-
ties are suggested
Communication tool that in-
volves clients, employees and
other users in the process
Tool to manage knowledge
and other intangibles
Methodology
Developed by a wide range of
researchers from six countries
using the DELPHI methodol-
ogy
Works very closely with com-
panies. Prepares reports on
these same companies
Revision of examples, estab-
lishment of comparisons and
best practice.

2. Methodology of the investigation panies. The final document is arrived at through

Evidently, the use of different methodologies in
the development of the Guidelines will have a
clear impact on the final results.
The MERITUM Project can be considered
the most ambitious because it includes various
countries. It describes how to prepare an Intel-
lectual Capital Report and also proposes a model
for managing intangibles. As it was developed
by a wide range of geographically dispersed
researchers there were difficulties in arriving at
a consensus.
The best practices of approximately eighty
European companies were analysed and the con-
clusions validated by a group of experts using a
Delphi analysis. The Intellectual Capital Report
is, therefore, presented as the logical conclusion
of the process of managing intangibles.
The DATI researchers (university professors,
members of government and consultants, amongst
others) worked much more closely with compa-
nies; the majority of which already had experience
in managing intangibles and were guided and
supervised by the DATI team in the development
of Intellectual Capital Reports.
On the other hand, the NORDIKA Guidelines
are supported by a thorough conceptual revision
of the different models in existence, as well as
numerous examples and comparisons of com-
a detailed study of the best practices currently
employed in the Nordic countries.
In table 2 the principal differences and similari-
ties in the first part of the comparative analysis are
set out. Reference is made to the final document
produced by the studies, the Guideline.
FuTuRE TREnDs
For all the foregoing, we understand that it is nec-
essary to have a commonly accepted international
frame of reference, which provides companies
with a basis for the identification and measure-
ment of their intangibles. These guidelines will
not constitute a proposal for the modification of
accounting rules.
According to the OECD (1999), changes in
accounting rules may be necessary in the future
but, for the moment, all the efforts concentrated
on the measurement and publication of informa-
tion, should be subject to testing and applied
voluntarily.
As it turns out, in the depths of the OECD a
certain consensus has been established that, little
by little, steps should be taken in the development
of voluntary guidelines to measure, report on and
manage intangibles.

141
 An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines

Table 3. Comparative elements in the established recommendations

MERITUM DATI NORDIKA

Designation of tasks to dif-
Practices used and implementa-
ferent subjects in three well
tions procedures
defined phases
The most clear: includes vi-
Structure sion, resources, activities and
indicators
Doesn’t establish any, they are
Indicators
specific to each company
Internal (fundamentally
Users
directors) and external
Source: own work
Directors should commence
the process, which will have
four phases.
Semi-closed structure, includ-
ing Auditor’s Report on Intel-
lectual Capital
Must be strictly related to
actions
Stakeholders
More subjects involved and
the organisation must get
ready for that
Doesn’t propose any particu-
lar structure
Lacks a fixed scheme, they
should be developed with
strategic purposes
Principally internal, also
external

ConClusions an established theoretical framework, the main

We have to emphasise that, despite not finding
significant differences between the Guidelines
analysed, the similarities are still far from con-
figuring a single Conceptual Framework offering
comparability and homogeneity for carrying out
Intellectual Capital Reports.
An effort at benchmarking and cooperation
between the researchers of the Guidelines stud-
ied, in order to complete the actualisations that
are contemplated, would be an excellent starting
point for exploiting synergies and achieving a
wide consensus in different basic aspects of the
measurement of intangibles in general and Intel-
lectual Capital in particular.
So that researchers, consultants, politicians
and professionals who work in the field of in-
tangibles can achieve the necessary and desired
degree of comparability, governments should
promote the development of a commonly ac-
cepted Guideline.
For this purpose, the identification of best prac-
tice in the existing Guidelines, should be the start-
ing point of any initiatives that seek to harmonise
the measurement practices for intangibles.
Nevertheless, there are forces pushing in the
opposite direction. In some countries that are in
an early stage of research, and which do not have
problems to be overcome are: resistance to change
and groups that promote certain approximations
(research groups, business and professional as-
sociations, government, etc).
In addition, companies demand freedom and
flexibility when they then decide how to handle
and report on intangibles and therefore oppose
specific regulations and obligations.
The final purpose of our efforts seeks to en-
fazise the fact that those specific guidelines should
be internationally accepted. This would allow
further empirical studies on those businesses that
decide to implement them, particularly and mainly
at a sectorial level. In this sense, those indicators
used for this purpose should be adjusted to the
specific characteristics of each sector.
Fortunately, various Spanish sectors have been
recently mobilizing to set common standards in or-
der to elaborate homogeneous Intellectual Capital
Reports. The Banking and Electrical sectors are
examples of entities leading this new tendency.
REFEREnCEs
Bañegil, T., & Sanguino, R. (2007). Intangible
measurement guidelines: a comparative study
in Europe. Journal of Intellectual Capital, 8(2),
192–204. doi:10.1108/14691930710742790

142
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
Brennan, N., & Connell, B. (2000). Intellectual
Capital; current issues and policy implications.
Journal of Intellectual Capital, 1(3), 206–240.
doi:10.1108/14691930010350792
Carter, A. (1996). Measuring the performance
of a Knowledge-based Economy. OCDE Report
Employment and Growth in the Knowledge-based
Economy, Paris, OECD.
Chaminade, C. (2002). Can guidelines for Intel-
lectual Capital reporting be considered without
addressing cultural differences? An explorative
paper. In Proceedings The Transparent Enterprise.
The value of intangibles. Madrid: Autonomous
University of Madrid.
Danish Agency for Trade and Industry –DATI-
. (2000). A guideline for Intellectual Capital
Statements. A Key to Knowledge Management.
Retrieved June 1, 2009, from http://en.vtu.dk/
publications/2001/a-guideline-for-intellectual-
capital-statements/a-guideline-for-intellectual-
capital-statements-a-key-to-knowledge-man-
agement
DATI. (2003). Intellectual Capital Statements –
The New Guideline. Retrieved June 1, 2009, from
http://www.pnbukh.dk/site/10186.htm
Del Bello, A. (2002). A regulatory competition?
A critical comparison of the existant guidelines
and recommendations on ic statements and intan-
gibles reports. In Proceedings The Transparent
Enterprise. The value of intangibles. Madrid:
Autonomous University of Madrid.
Guimón, J. (2002). Guidelines for intellectual
capital management and reporting. Comparing
the MERITUM and the Danish approaches. In
Proceedings The Transparent Enterprise, The
value of intangibles. Madrid: Autonomous Uni-
versity of Madrid
MERITUM. (2002). Guidelines for managing
and reporting on intangibles. Intellectual Capital
Report, Ed. Fundación Airtel Móvil. Retrieved
June 1, 2009, from http://www.pnbukh.com/site/
files/pdf_filer/MERITUM_Guidelines.pdf.
Nordic Industrial Fund. (2001). Intellectual
capital. Managing and reporting. A Report from
the Nordika Project. Retrieved June 1, 2009,
from http://www.nordicinnovation.net/_img/
nordika_report_-_final1.pdf
Nordic Industrial Fund. (2002). Nordika – Frame
Market Survey. Norway: Author.
OCDE. (1999). International Symposium on
Measuring and Reporting Intellectual Capital:
Experience, Issues and Prospects. Amsterdam:
Author. Retrieved June 1, 2009, from www.
oecd.org/dsti/sti/industri/indcomp/act/Ams-conf/
symposium.htm
EnDnoTEs
1
Related to it we can read the article published
by Brennan and Connell (2000).
2
Its structure is defined having in mind three
capitals: Human Capital, Structural Capital
and Relational Capital (or Client Capital).
3
The Kaplan and Norton model can not be
considered specifically as a Intellectual
Capital Model but, seen that it has been
the first which exceeds the only financial
vision, we think we must incorporate it to
this study.
4
This guideline is base on empirical research
as well as a thorough research in this field,
lead by the Copenhagen Business School and
the Aarhus School of Business, in coopera-
tion with the consulting enterprise Arthur
Andersen in Denmark. Additionally, more
than a hundred Danish companies have final-
ized their intellectual capital reports based
on these guidelines.
143
144

Chapter 9
The Role of ICTs in the
Management of Multinational
Intellectual Capital
Mirghani S. Mohamed
New York Institute of Technology, Bahrain

Mona A. Mohamed
New York Institute of Technology, Bahrain

ABsTRACT
This chapter provides a systematic multidisciplinary framework that defines the role of technology in
leveraging IC across borders and between headquarters and subsidiaries. In reaching this conclusion,
this chapter investigates the strategic importance of Information and Communication Technologies (ICTs)
in the management of Intellectual Capital (IC) within a Multinational Company (MNC) ecosystem. The
chapter addresses the transubstantiation of MNC into boundaryless Global Knowledge-Based Organization
(GKB-MNC) which ultimately propagates into Learning MNC (LMNC). The latter is a suggested MNC
category that sustains competitive advantage through systemic adoption of “Knowledge Iterative Supply
Network (KISN)” model proposed by the authors. The chapter suggests a new multinational ICT/IC
governance strategy that handles the emerging complexities associated with modern intangible resource
synthesis. In effect, these complexities originate from the introduction of functionalities such as just-in-
time knowledge supply, elicitation of tacit knowledge, and leveraging of the core competencies for the

PRolEGoMEnA who reports that “the rise of the ‘new economy’,

The current global economical transformations
have resulted in a turbulent marketplace that
needs continual IC value rejuvenation to create
and sustain companies’ competitive advantage.
This fact has been highlighted by Guthrie (2001)
DOI: 10.4018/978-1-60566-679-2.ch009
one principally driven by information and knowl-
edge, international competitiveness and changing
patterns of interpersonal activities is attributed to
the increased prominence of intellectual capital
(IC) as a management and research topic.” Hence,
this evolution in the IC is highly correlated with
the growth of Knowledge Management (KM) as a
new management discipline. Meso & Smith (2000)

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
The Role of ICTs in the Management of Multinational Intellectual Capital
testify that with the developments in KM, intel-
lectual capital is gaining a reputation as the only
strategic asset.
It has been reported by many investigators that
ICTs help to establish social networks through
their deployment via digital networks. In addi-
tion, ICTs provide channels for communication
and learning for the improvement of products
and services (Jitsuzumi et al. (2001), Hedelin
& Allwood (2002), Mansell (2002), Baddii &
Sharif (2003,Mohamed (2007b) . Galán et al.
(1999) report that ICTs form one of the pillars for
global competitive advantage, in which there is
a high competition in the marketplace. Further-
more, Stromquist & Samoff (2000) report that
“as globalization expands the twin forces of the
market and information technologies are pervad-
ing the educational arena. One instance is the
Knowledge Management System (KMS), which
proposes to produce easily retrievable materials
via the Internet and hypertext. KMS attempts to
be more than a mere data bank, for it seeks to
provide highly selected and targeted knowledge”.
However, Duffy (2001) states that it is difficult
to capture all valuable knowledge needed by the
organization. There is an opportunity now to
harvest, transform, share, and reuse knowledge
instantaneously though modern technology. We
would add that it is unlikely that competitors will
have the same mixture of technology and human
capital to replicate the same kind of knowledge.
Nevertheless, Mohamed (2007b) states that “ICT
tools compress global business life-cycle through
the ease of data exchange and analysis at various
global levels. The mobilization of explicit knowl-
edge through virtual communication significantly
contributed to the sharing of knowledge, but
mostly at the operational levels and less at the
managerial level; this can be attributed to the fact
that ICTs lack the ability to transform knowledge
as they transfer it.”
This article argues that although the world
is experiencing the upshots of the knowledge-
based economy (Havens & Knapp (1999), Civi
(2000), and Lubit (2001), in which knowledge
is the most important sustainable competitive
advantage (Williams (2001), Bristow (2000),
Gupta et al. (2000), IC elements for many MNCs
still exist in disconnected islands. This scattered
IC, in various MNCs’ subsidiaries, resulted in
loss of what could have been a significant added
value for these companies. ICTs may contribute
to the solution of such a complex problem; how-
ever, one of the bona fide challenges facing the
use of technology to manage IC is “knowledge
de-contextualization” or “knowledge dilution”.
These effects happen during the codification and
externalization processes. However, proper con-
solidation of different types of ICs with diverse
types MNCs may help in lessening such negative
impacts. Nonetheless, this may happen only, if
a true synergetic integration of IC stream from
different MNCs’ subsidiaries is reached.
MnCs’ Typology and
iC Classification
Perlmutter developed the first typology of MNCs
that consists of three categories: ethnocentric
which is a home-country oriented MNCs, polycen-
tric that describes host-country oriented MNCs,
and geocentric that is characterized by a world
orientation profile (Michailova & Nielsen (2006),
Maclean (2006) and Downes et al. (2000)). In a
modification of such a classification, Kaye &
Little (1996) reported that Heenan and Perlmutter
presented four different approaches to internation-
alization, namely, ethnocentrism, polycentrism,
regiocentrism and geocentrism. These categoriza-
tions are based on the power of the headquarters,
and the cultural effects. However, the classifica-
tion does not consider the interconnectedness of
subsidiaries to mobilize IC, and the leverage the
core competencies need to create value proposi-
tion and consequently market value.
Mcconnachie (1997) defines intellectual as-
sets at the Dow Chemical Company as knowl-
edge with value and the cornerstone for creat-
145
 The Role of ICTs in the Management of Multinational Intellectual Capital
Figure 1. The interaction effects of the three most common categories of IC.
ing the company’s wealth. Similarly, Miller et
al. (1999) define IC as “intangible resources
within an organization related to information and
knowledge that are not generally measured or
appreciated, but contribute to an organization’s
success.” The author classified IC into human
capital, structural capital, and customer capital.
Human capital (employees) refers to what is in
the minds of individuals, while structural capital
(internal) is anything other than human capital
within a company including process, procedures,
policies, networks, software, databases, intel-
lectual properties, while customer capital refers
to customer relations. However, Seetharaman et
al. (2004) used the same classes, but the author
replaced customer capital with relational capital.
The relational capital governs external relations
with customers, alliances, licensing and agree-
ments. Moreover, Cohen & Kaimenakis (2007)
modified Skandia’s classification scheme into
only two major classes, namely, human capital and
structural capital. However, the authors divided
the latter into two other sub-classes described as
146
relational capital, which is previously described
by Seetharaman et al. (2004), and organizational
capital. The latter consists of databases, organiza-
tion charts, strategies, manuals, etc. The customer
capital has been subdivided into more sub-capitals
as Allee (1999) suggested an expanded scheme
that in addition to human capital, structural capital
and customer capital also includes social capital
and environmental capital.
From the above description, it is obvious that
the definition of IC is as blurred as its components.
However, the relationship between the three main
components of IC and their interaction effects
can be depicted as in Figure 1 and explained in
Table 1.
The hybridization of MnCs and iC
Even though, classification of MNCs and typology
of IC have been attempted by many investigators,
surprisingly, there is no correlativity between the
two spheres in the literature. This chapter proposed
three types of MNCs that can be defined based
The Role of ICTs in the Management of Multinational Intellectual Capital

Table 1. The Three IC Component Interactions and their Meaning Relative to their Cumulative Final
Effect on Intellectual Capital

Area Description
1 Emphases are on human capital that intensifies tacit knowledge, the know-how, and consequently innovation. But, due to
lack of means of knowledge mobilization this intellectual agility remains confined to its own subsidiary. Consequently,
MNCs with this type of IC will suffer from “intellectual capital divide” between various subsidiaries due to poor knowl-
edge brokering.
2 The focus in this area is on strengthening outward relations with the business community to promote value networks,
customer loyalty, and communication channels to nurture and share knowledge. The full benefit of this capital cannot be
attained, unless MNCs employ it for the benefit of the structural and human capital (inward networks) advancement.
3 In this area, emphases are on structural capital where policy and procedures are potent and ICTs are robust in transferring
knowledge. Moreover, property rights are protected and the MNC will be culturally prepared to accept the growth of IC.
However, these cannot be properly employed because of the human and relational capital negligence.
4 In this area, poor relational capital results in inadequate communication with the external business community and stakehold-
ers. Exotic knowledge and feedback from stakeholders and customer will be minimal. Response to customer requirements
will always be poor. Consequently, the MNC will have a poor reputation and that will make customer loyalty ephemeral.
5 This interaction shows poor structural capital has a negative effect on both human and relational capital. Both tacit and explicit
knowledge of the firm will be impacted due to poor management of ICTs infrastructure, intellectual property, procedures
and culture. Accordingly, the company will lose control over its human resources and its knowledge repositories.
6 Due to this interaction employees will be characterized by poor skills, expertise, core competencies and capacities. The
learning process will be restrained and the organization will depend on explicit knowledge more than tacit knowledge (Figure
2). Consequently strategic innovation, value creation, and organization competitiveness will be at their minimal levels.
7 In this triple relationship the optimal IC value obtained, MNCs stability and maturity levels are reached, and there is a
high level of tacit and explicit knowledge integration. The company at this stage must de-layer the rigid cultural strata and
become organic and flat. All three capitals will work in harmony and according to the needed proportionality.

Figure 2. Mapping the transformation of MNCs based on IC types and a modified Perlmutter’s MNC
classification.

on IC management practices, namely, Traditional

MNCs, Global Knowledge-Based MNC (GKB- Traditional MNCs
MNCs), and Learning MNCs. This proposal is
shown in Figure 2. There are many differences between IC activi-
ties within MNCs and IC processes in national

147
 The Role of ICTs in the Management of Multinational Intellectual Capital
companies. These differences are the result of
geographic distance, cultural diversity, and mana-
gerial style (Stewart et al. (2000), Kaye & Little
(1996), Davis et al. (2005) (Granell (2000), Higgs
(1996), Alexander Kouzmin (1999) and Kidd
(2001). However, many MNCs still live in their
ethnocentric contexts, because of their manage-
ment ignorance of what the authentic MNC needs.
Morrison & Beck (2000) found that “98 percent
of the USA and UK managers have no clue how
to be global; still they are responsible for global
operations. This is because mangers restrict their
thinking to the management of physical assets.
Furthermore, “they intended to give the rest of
the world a lesson on how to do things according
to their way”. Traditional MNCs disregard cross-
cultural diversification as a factor affecting IC
creation, hence, their knowledge mobilization is
very limited to the time before the real meaning
of globalization is understood. These companies
fall into the old pathogenic closed system that
is characterized by intense “cultural collisions”
i.e. physically exist in the global market, but
managed by local companies mentality. IC in
traditional MNCs is dominated by subsidiary
intra-communication, but with minimal interaction
between subsidiaries and the headquarters except
what is dictated by the rigid hierarchical structure
of the firm. The scope of innovation is limited to
the boundaries of these subsidiaries, because the
tap on knowledge that transcends national borders
depends on the individual subsidiary decision i.e.
it is not part of the MNC policy. Consequently,
Mohamed (2007b) reports that globalization is
“misunderstood and misused by many egotistical
multinationals that arrogated the ownership of
globalization and shoehorned it to their purpose,
then call upon the rest of the world to comply.”
With various developments of the distributed
systems and the advancement in communication
systems a different kind of knowledge-based
MNC has emerged.
148
Global-Knowledge-Based MNCs
Global Knowledge-Based type of MNC (GKB-
MNC) is significantly affected by the manage-
ment of human and structural capital (Figure 2),
therefore, it is flatter than the rigid traditional
MNCs. Besides ICTs, intellectual property pro-
tection and procedures, structural capital helps in
harmonizing cultures of different subsidiaries. The
cultural differences between Eastern and West-
ern hemispheres have great influence on which
side of the GKB-MNC companies will take. For
instance the former depends on structural capital
and the latter depends on human capital. Vig-
nali (2001) observed that McDonald’s in Beijing
depend on personal interaction with customers;
on the contrary, it depends on technology in the
US. Due to the distances between knowledge
source and knowledge receiver, MNCs attempt
to transfer knowledge within and between sub-
sidiaries through explicit knowledge channels.
These channels are represented in knowledge-
bases and other means as shown in the butterfly
framework depicted in Figure 3. This may be due
to the dominance of technology that encourages
the emergence of this type of MNC. Lang (2001a)
attributes the major changes in the business pro-
cesses to the rapid growth in technology and the
international competition; the former transformed
into knowledge-based competition.
Furthermore, Mohamed (2007a) states that
the progression of distributed computing up to
the emergence of grid computing in the mid 90’s
emulates social networks in its intent to nurture
and mobilize knowledge attributes across global
communities.
The butterfly effect is depicted in Figure 3 is
a framework named after the famous butterfly
concept in chaos theory, in which patterns exist
in all chaotic natural behavior. Equally, human
capital processes affect structural capital which
ultimately affects the construction of the GKB-
The Role of ICTs in the Management of Multinational Intellectual Capital

Figure 3. The Effects of Human capital and Structural capital in the (Adopted and modified from the
butterfly framework suggested by Mohamed (2007b))

MNC. For instance, the teaming and communities
affect the expert networks, alliances and even-
tually all will result in the creation of network
externalities. Similarly, knowledge economy has
a rippling effect on GKB-MNC as shown in the
backbone of the butterfly framework. Mohamed
et al. (2004) states that the recent shift of the
economy towards intangibility (knowledge as-
sets) curtails command and control behavior and
boosts cross-functionality in an attempt to exploit
the intellectual capital for a differential competi-
tive advantage in the market place. The structural
capital wing mainly expressed explicit knowledge
through ICT applications and intellectual proper-
ties, and referred to the knowledge mapping for
sharing. Stewart (1999) reports that the reasons for
managing structural capital are rapid knowledge
sharing, collective knowledge growth shortened
lead times, and more productive people.
The Learning MNC
The traditional MNCs, and to some extent GKB-
MNC, are characterized by inflexible isolated silos
that inhibit critical IC flow and suppress MNCs
innovativeness which is quintessential for MNCs

149
 The Role of ICTs in the Management of Multinational Intellectual Capital
profitability. The intromission of new IC man-
agement principles employing ICTs into MNCs
and practice cross-learning between subsidies is
imperative. This needs the organization to recon-
figure itself in a way that smoothly mobilizes IC
between different stakeholders and over different
time zones and geographical locations. Such re-
quirement can be satisfied with a Learning MNC
(LMNC) milieu. LMNC is a learning organization
with geographically separated, but epistemologi-
cally connected entities. In other words, it is a flat
learning organization with physical distances.
LMNC is continuously nurtured as an organic
organization that de-layers its rigid hierarchical
strata through IC sharing processes. This may lead
to a reliable global ‘cognosphere’, in which the
company can tap on domestic and exotic IC from
stakeholders. Therefore, LMNCs must establish
interconnected learning process that comply with
the firm’s intellectual capacities asset within its
subsidiaries, stakeholders, customers, suppliers,
alliances, and even competitors in a “coopetitive”
setting. In LMNCs environment companies are
pushed into the direction of holistic system think-
ing in which people envision the whole interact-
ing system with its all components rather than
focusing on isolated elements that are under the
control of their own subsidiary. Hence, for MNCs
to sustain their competitiveness, they must build
a strategic global learning scheme that creates
a perpetually valuable knowledge, and ensure
knowledge equitableness between subsidiaries
that belong to the same MNC.
Learning is the main determinant of profit-
ability and competitiveness. Pemberton & Stone-
house (2000) report that the development of many
companies into learning organizations was the
main reason behind the success in their competi-
tion. Hall (2001) also supports this argument by
analyzing the value-added by knowledge in the
global arena. He found that the most optimized
knowledge gain is within learning organizations,
which is a determinant of the organization success.
Furthermore, Venugopal & Baets (1995) report that
150
globalization forced firms to transform themselves
into learning organizations. More specifically,
Kagia (2002) suggests that learning agenda have
been pushed by the global knowledge economy.
The author adds that besides new technologies,
the know-how and new ideas are the source of the
economical growth and development.
LMNCs predict the requirements of their cus-
tomers through pattern recognition, modelling,
and market segmentation. This can be achieved
through robust data mining tools that work against
warehouse of transactions, documents and cus-
tomers’ feedback. This may lead to the develop-
ment of clear-cut core competencies needed by
the customer. Quinn (1999) found that the core
competence form the quintessence of value
propositions and offer the inspiration for clients
to favor the firm business model of services or
product over its rivals.
For nurturing and streaming the synergetic ef-
fects of IC and core competencies within LMNCs,
ICTs must be augmented by conglomerations of
human capital ‘Network externalities’ (NE) that
originate from autonomous teaming structure such
as Cross-Function Teams (CFT), Virtual Commu-
nities of Practice (VCoPs) and “expert networks”.
One of example of these networks is the Epistemic
Community (EC), which is described by Tiessen
(1999) as universal experts team that think in
concert to allow MNCs to innovate as a result of
pooling knowledge from different geographies.
The accumulation of such structures will allow
for synergetic pooling of experiences, knowledge
and best practices. The increase in such network
size leads to exponential increase in LMNC in-
novativeness and competitiveness.
The Role and Governance
of iCTs for iC
The strategic importance of ICTs in shrinking
the time and geographic distances of MNCs is
undeniable. Friedman (2005) observed the flat-
ness of the world due to whole set of technology
The Role of ICTs in the Management of Multinational Intellectual Capital
convergences. The author states that different
technologies including the fiber-optic networks
made it easy for people to work together, and that
leveled the playing field for workers to share their
work. Mohamed (2007b) states that “in the global-
ization realm, ICTs are the driving force behind
shrinking physical and temporal distances and
transmitting knowledge across different cultures.
In general, ICTs play a major role in progressing
globalization through simulating social networks
within the physical networks, opening commu-
nication channels, fostering human development
and improving services and products”. Therefore,
ICTs become differentiating factor for many
MNCs, Galán et al. (1999) believe “technology
as one of the elemental pillars of competitive
advantage in the international market, in which
intense competitive capabilities are required from
companies.” Knowledge Management System
(KMS) automation as a platform for IC provides
irrefutable services for mobilizing just-in-time
knowledge for decision-makers around the world,
Mohamed (2007a) states that KMS with all of its
components of networking, clustering, hardware
and software, is becoming critical for mobiliz-
ing knowledge in the global knowledge-based
economy. Technology, through its smart devices,
agents, alerts, mining and semantics, is becoming
more than an enabler for KM. In fact, purposefully
using technology in KM programs is inevitable,
and becoming a necessity in the global arena.
Lang (2001b) reports that “globalization is driven
by Internet and Infocomm technologies in many
ways. The economies of the world are progres-
sively interconnected through people and ideas,
investment, goods and services. This resulted
in new formats of competition and cooperation
as companies push for greater productivity and
better efficiency”.
ICTs offer an adaptable channel for communi-
qué of intangible assets in dispersed geographies
(Duffy (2000); and Lang (2001a). Shariq (1997)
observed that the world is getting into a new state
where opportunities are shaped by people who
have the ability to utilize their knowledge which
embodied in technology and human capital. Mo-
hamed (2007b) states that “globalization altered
many KM conventional processes and procedures
due to mobilization of knowledge through itinerant
agents augmented by avant-garde ICT channels.
The resultant knowledge spans across multination-
als and commit ‘bidirectional transmutation’ due
to different cultures and heritages of knowledge
nurturing.”
ICTs facilitate the diffusion of exotic (inter-
MNCs) knowledge across the multinational body,
and ease the infusion of domestic (intra-MNCs)
knowledge in various subsidiaries. The exotic
knowledge sources such as customers, manufac-
turers, distributors, suppliers and even competitors
are vital for relieving MNCs from the traditional
lock-in effect. On the other hand, the hybridization
of the already inextricably interrelated domestic
and exotic knowledge increases MNCs’ innova-
tiveness and minimizes the intricacy caused by
the unidentified attributes in the evolving global
marketplace.
In its natural progression, ICTs shift from
supporting disintegrated functional systems to
facilitating integrated processes. The latter is
accomplished through emerging ICTs archi-
tectures such as grid computing, fiber optic,
federated hubs, object-oriented technologies and
business conglomerations establishments such
as technology parks, incubators and knowledge
villages.
ICTs governance needs to be aligned with the
new global knowledge governance. This can be
achieved through building proper architecture,
system development, and customized application
to fit the role of ICTs in managing IC throughout
different phases of Knowledge Iterative Supply
Network (KISN) (Figure 4). During knowledge
discovery ICTs play a major role in the conversion
of data to information when human capabilities
are slow in such process. This conversion can
be achieved through statistical analysis and data
mining tools. However, ICTs may not be helpful
151
 The Role of ICTs in the Management of Multinational Intellectual Capital

Figure 4. Knowledge Iterative Supply Network (KISN) processes that facilitates the transformation
of traditional MNCs into Learning MNCs. The dotted lines represent the role of ICTs. Adopted from
Mohamed (2008)

during the conversion of information into knowl-
edge, where human cognitive dimension is needed
for synthesizing and organizing knowledge. The
analysis phase depends on human thinking more
than it depends on ICTs. While classification can
be performed better with ICTs; organization, as-
similation and synthesis are human activities that
require the power of double loop thinking and
reflectivity. Presentation of procedural knowledge
can be carried out by ICTs channels; however,
deeper knowledge layers may need intervention
of humans. Additionally, the transfer of data for
validation at different levels can be fulfilled via
ICTs tools with robust convertibility, mobility
and interactivity. Nevertheless, the feedback that
results in new data and originates from communi-
ties of practice or other networks must be carried
out by humans.

152
The Role of ICTs in the Management of Multinational Intellectual Capital
Figure 5. The Effects of time zone and geographic distances on communication media selection.
The role of ICTs in intra- and enter-subsidiaries
communications vary according to the geographic
remoteness and time zone (Figure 5). For short
distances under the same time zone a face-to-face
interaction is preferred as it is the best way to
sharing tacit knowledge. Metzker (2001) justifies
this kind of communication as “The hormones
stimulated when we are face-to-face with people
lead to trust and bonding, and possibly enhance
pleasure and reduce fear. Large or completely
virtual organizations cannot support physiological
responses that are most needed for accomplish-
ing work and for providing the trust needed for
sharing knowledge and other resources”. When
the face-to-face interaction is difficult due to
stretched distances, then the use of proper dis-
tributed technology is permissible. Collaboration
through real-time synchronous technologies is
preferred over any-time asynchronous technolo-
gies. However, this synchronicity depends on
many intermingling factors such as the availability
of the proper technologies and the confidentiality
of the shared knowledge.
ICTs and IC Challenges
Although there is a chimera that ICTs is the utopian
panacea for globalization communication prob-
lems, the contribution of ICTs to the synthesis of
IC and other intangible assets remain debatable
(Brockway (1996), Reneker & Buntzen (2000),
Eito (2002). The success of deploying ICTs across
MNCs boundaries depends on human capital,
and how much these ICTs are effective depends
on the relational capital. In general, ICTs ease
information storage, retrieval, and transfer, but
it cannot replace people. At the global level, the
challenge of ICTs as a tool for IC management
comes from the fact that ICTs infrastructures are
founded on the basis of bivalent logic i.e. 0 or 1,
true of false, black or white etc. The following
represent major challenges for ICTs when used
to manage IC in MNCs settings:
• Codification effects: the fundamental no-
tion of information theory is centered on
entropy, where decisions can be made un-
der uncertain conditions and incomplete
information. When ICTs are used as a con-
duit for IC flow, entropy may result from
the ‘knowledge de-contextualization’ or
‘knowledge dilution’ during tacit knowl-
edge externalization or during the process
of codification. Mohamed (2007b) argues
that due to knowledge de-contextualiza-
tion during externalization, ICTs are not
153
 The Role of ICTs in the Management of Multinational Intellectual Capital
the utopian panacea. Indeed, ICTs without
human cognitive intervention broaden the
scope of information overload, widening
the IC inequitableness and other discrep-
ancies between subsidiaries within the
globalization equation. Mohamed et al.
(2006) states that ICTs assimilation and
representation of knowledge intangibility,
dynamism, experience and other humanis-
tic cognitive dimensions remain debatable,
unless technology shreds its bivalent logic
image and instead learn to operate within
an authentic continuum. The development
of ICTs in areas such as natural language,
XML, neural networks, grid computing
and search engines offers new opportuni-
ties to the codification process.
• Binary logic barrier: Due to the binary log-
ic fundaments of ICTs, the synthesis and
representation of knowledge intangibility,
dynamism, experience and other humanis-
tic cognitive dimensions remain debatable
when ICTs employed for IC elucidation
and redistribution over global distances
without human interference. Mohamed
(2008) states that so far, KMT is not mature
enough to deliver bona fide KM processes.
The distance from data to knowledge can-
not be handled by the existing technology
unless technology cast off its bivalent log-
ic. Despite the recent leaps in technology,
the situation is still perplexing and elusive.
This is because KMT deals with the knowl-
edge continuum either as discrete unrelat-
ed events or as one class with no different
technological requirements.
• Infrastructure disparity: The dispropor-
tionately of the ICTs physical infrastruc-
tures and the differential learning capacity
in various MNCs hosting locations result
in an unequal distribution of knowledge
and flow channels.
• Tools selection: If IC is a subset of knowledge
and knowledge is a superset of information,
154
then it is logical that information technology
cannot be used to handle intellectual capital
with the same efficiency. Due to the complex-
ity of IC requirements, selecting the most ap-
propriate KM technology is a perplexing is-
sue. The process must consider unique social,
behavioral as well as technological factors of
the targeted environment.
• IC Metrics: It is difficult to explicitly de-
fine the relationship between business stra-
tegic objectives, metrics, and the intellec-
tual assets (Gibbert et al. (2001), Kennedy
(1998), Caddy (2000) and Brennan &
Connell (2000)). In addition, the common
accounting system has not considered item-
izing and reporting IC in the general led-
ger spreadsheet (Petty & Guthrie (2000),
Koenig (1997), Kennedy (1998), Caddy
(2000), and Brennan & Connell (2000)).
For such determination, MNCs must define
their ‘CI level’. IC leveling is the depth of
the dependency of MNC on specific type
of IC, which in turn based on the degree
of globalization and the degree of ‘tacicity’
within the MNC milieu. There is the pro-
cess of determining the need for policy and
control objectives to govern the Return-
On-Investment (ROI) from IC, especially
then ICTs deployed at a wide range as a
means of communication. However, MNCs
face genuine challenges in measuring and
reporting IC due to the non-subjectivity of
tacit knowledge.
ICTs Role in IC Metrics
If the measurement of IC is important for any firm
to be properly managed, it is even more impera-
tive in the case of MNCs due to the difficulty of
management over geographic distances and cultural
differences. Reports that show the value of the
company’s intellectual assets are even more impor-
tant than those detail physical assets because IC is
the fundamental for value creation and cash flow.
The Role of ICTs in the Management of Multinational Intellectual Capital
Furthermore, a proper IC management is required
for properly managing the customer requirements
through the response to their feedback. Hence,
many companies have been obligated to investigate
the measurement of their IC to provide a better
foundation for its management.
The process of IC creation is very dynamic
in the MNC environment, and so is its measure-
ment process. Therefore, valuing IC is difficult in
both of its forms both qualitative and quantitative
evaluations. Many investigators suggested tying
of IC measurements to KM measurements (Pablos
(2003), Liebowitz & Suen (2000) and Liebowitz
& Suen (2000)). Guthrie (2001) emphasized the
importance of management, measurement and
reporting of IC as a result of re-engineering the
orthodox accounting system procedures. The
author recognizes the difficulty of measuring the
intangible assets by assigning specific monetary
value to it, but he warned that, if the intangible
assets are not incorporated in the formal account-
ing system, then the financial and management
reporting will become irrelevant as a tool that
support the decision making process.
The difficulty comes from the unfeasibility of
correlating human capital indictors to accounting
parameters such as Return-On-Investment (ROI)
and Net Present Value (NPV). In addition, unlike
structural capital, human capital is less control-
lable, more dynamic and can easily be lost when
people leave the organization. Hence, human
resources policies may have a significant impact
on such capital. Pablos (2003) predicted that the
approaching knowledge economy will require
different tools for measuring and managing or-
ganizational knowledge. Furthermore, the author
chose Tobin’s as a valid measure for the firm’s
intellectual capital which is a ratio between the
market value and the reposition value of physi-
cal assets.
Although human capital is the most valuable
capital, it is the most difficult to measure. However,
developing software or creating a procedure is one
form of manifestation of the transformation of hu-
man capital into structural capital i.e. this capital
externalization produces confounding effects on its
measurement. Liebowitz & Suen (2000) state that
“direct measures will normally be size-oriented
metrics like thousand lines of code/person-month,
defects/ (thousand lines of code), and others. Indi-
rect measures are function-oriented metrics such
as the number of user inputs and outputs, function
points per month, years of experience, number of
dollars invested/used, years of education/research/
management, and the like.”
It is relatively easy to measure the struc-
tural capital components because they are either
tangible or related to ICTs measures. Austin
(1998) described technology helpfulness in the
comprehensive measurement of management
parameters. However, that depends on the mea-
surement technology design and implementation.
Nevertheless, Mohamed et al. (2006) argued that
using technology in measuring the KM is a direct
process because you can clearly see patterns such
as database access or number of hits for certain
knowledge objects. In these cases the associated
innovation can be accounted for, but it may not
be easy to quantify; therefore, KM measurements
using technology should be used with care tak-
ing into account the confounded effects of non-
quantifiable non-financial measures.
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159
160

Chapter 10
The Link Between Learning
Capability and Business
Performance in MNEs:
The Role of Intellectual Capital
Isabel Ma Prieto
Universidad de Valladolid, Spain

Elena Revilla
Instituto de Empresa, Spain

ABsTRACT
It is widely recognized that the development of learning capability is key to achieve a durable competi-
tive advantage. This is especially true in the context of MNEs. When MNEs operate in disparate host
countries, they enhance their knowledge bases, capabilities, and competitiveness through learning
processes. The analysis of the relevance of learning capability to improve business performance and,
thus, the organizational competence has been an important issue developed in literature. This chapter
explains the link between learning capability and the improvement of business performance by com-
paring how the main dimensions of learning capability –knowledge resources and learning processes-
impacts on performance, in terms of both non-financial and financial performance. It is argued that
those MNEs with the highest levels in both their knowledge resources and learning processes obtain a
superior performance.

inTRoDuCTion with the environmental conditions, and this is pos-

In the present competitive environment, character-
ized by continuous changes and profound dyna-
mism, companies widely identify learning capability
as a critical attribute for achieving and retaining
competitive success. Firms need to transform and
refine their knowledge resources in accordance
DOI: 10.4018/978-1-60566-679-2.ch010
sible through learning processes. In essence, it is
often recognized that organizations learn for two
basic purposes: to explore new opportunities and
to exploit existing ones (March, 1991). Literature
has shown a growing interest about learning capa-
bility (Easterby-Smith, 1997) and, specially, on the
consequences of learning capability on business
performance and competitiveness.

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
The Link between Learning Capability and Business Performance in MNEs
The importance of learning capability for
MNEs’ survival and effective performance has
been emphasized widely in the literature (Bar-
tlett & Ghoshal, 1987; Huber, 1991; Barkema &
Vermeulen, 1998). International expansion can
promote learning capability, which facilitates
the development of knowledge and competences
that help MNEs achieve competitive advantage.
The diversity of a MNEs international business
environment enhances its knowledge resources
through the learning processes developed through
interactions with local knowledge bases and
through exposure to different foreign markets
(Hsu & Pereira, 2008).
Given that learning capability is recognized as
a critical practice in MNEs, a deeper understanding
of the learning capacity-performance link offers
substantial value and importance to MNEs manag-
ers and researchers. But the absence of good con-
ceptual models about the MNEs’ learning makes
difficult the understanding of the effectiveness
of learning capability in MNEs. In light of this
situation, MNEs increasingly demand frameworks
able to explain how learning capability influences
the scope and deployment of internationalization
and thereby differentiates firm performance. The
main objective of the present chapter is to explain
the link between learning capability in MNEs and
business performance and, ultimately, to determine
how learning capability is associated with a better
performance of the MNEs. The key concern is
to characterize how organizations differ in their
learning capability to analyze the consequences for
business performance and, specifically, to address
the differences that lead to superior performance.
The differences are characterized on the basis
of both knowledge resources and its associated
learning processes as main dimensions of learn-
ing capability. With this aim, the chapter first
characterizes learning capability and the concerns
relative to business performance in MNEs. Then,
the chapter gives a snapshot of where differences
exist and how learning capability in MNEs may
thus relate to business performance.
learning Processes and
its Essential Forms
The concept of learning is understood from various
perspectives, and mainly developed in the psy-
chological field over a long evolutionary history.
The application of learning at the organizations
has been one of the most critical developments of
management literature, where it has been empha-
sized the crucial role of organizational learning
processes in firms’ survival and success. Differ-
ent definitions of organizational learning have in
common their attempt to explain what happens
or, more specifically, what changes in individuals
and organizations when they learn, that is, when
they acquire knowledge or get to know more.
Learning is in this regard seen as a relatively
permanent change in organizational knowledge
that is produced by experience, where the change
in knowledge entails both change in cognition
and change in behavior (Vera & Crossan, 2003).
Because of this notion of change, research on
organizational learning has dealt with questions
about how organizations adapt (Lawless & Finch,
1990), evolve (MacIntosh, 1999), grow (Land
and Mezias, 1990; Lant and Mezias, 1992), and
renew (Crossan, Lane & White, 1999) themselves
in order to face the challenges of an increasingly
complex and dynamic environment (Argyris &
Schön, 1978; Cangelosi and Dill, 1965; Fiol &
Lyles, 1985; Senge, 1990).
Accordingly, an organization’s knowledge
transformation in order to get adapted and aligned
with its environment is a result of learning process-
es. Activities in the international market stimulate
the need to fit new information into MNEs existing
knowledge, and presents an opportunity to change
their existing knowledge. Although organizations
need to learn through experience and refine their
existing knowledge and capabilities, they also need
to create variety in their knowledge and experience
through experimenting, innovating and risk taking.
In other words, organizations face the dilemma
of allocating resources to the exploitation of their
161
 The Link between Learning Capability and Business Performance in MNEs
existing knowledge or to the exploration of new
alternatives. Accordingly, March (1991) notes two
alternative forms of learning processes: explora-
tion learning processes and exploitation learning
processes. These forms of learning reflect other
classifications into different dichotomies of learn-
ing, such as double-loop versus single-loop learn-
ing (Argyris & Schön, 1978), generative versus
adaptive learning (Senge, 1990), and feed-forward
versus feed-back flows of learning (Crossan et
al., 1999), in example. The distinction between
exploration and exploitation captures a number
of fundamental differences in firm behavior that
may have significant consequences.
Exploration Processes
March (1991, p.85) defines exploration as a learn-
ing process that has the goal of “experimentation
with new alternatives that have returns that are
uncertain, distant and often negative”. Exploration
is thus a manifestation of organizational learning
(Slater & Narver, 1995) that entails the challeng-
ing of existing knowledge, ideas and competences
with entrepreneurial and innovative concepts. It
is about studying the environment for new op-
portunities and includes activities such as search,
variation, discovery, innovation, risk-taking, and
research and development. Accordingly, explora-
tion involves the search for new organizational
routines and the discovery to new approaches to
technology, businesses, processes, and products.
It thus requires new knowledge or departure from
existing knowledge. Accordingly, exploration and
new knowledge can expand the capabilities and
the range of responses available to the firm. March
(1991) posits that the outcome of exploration can
be difficult to measure in the short term, and thus
it might lack a high degree of efficiency.
Exploratory learning processes are especially
stimulating in the presence of multinational enter-
prises (MNEs). In the context of internationaliza-
tion, MNEs need to explore knowledge about their
foreign markets and operations in order to over-
162
come the challenges of unfamiliarity with foreign
markets and the liability of foreignness (Hsu &
Pereira, 208). In fact, the diversity of national and
organizational cultures makes available a broad set
of knowledge, experience, and background, and
increases the potential to scan the environment, to
recognize the existence of an opportunity, and to
create customer by properly seizing it. However,
even when the presence of such diversity could
be positively related to MNEs performance, the
diversity could also lead to problems by adding
situations that increase potential disagreements
and conflicts.
Exploitation Processes
March (1991, p. 85) defines exploitation as a
learning process that entails “the refinement and
extension of existing competences, technologies
and paradigms”. The central thesis of exploitation
is that it is possible to secure a comfortable posi-
tion in the marketplace by committing sufficient
resources to ensure the current viability of a firm
against its competitors. Thus, the emphasis is
on the organization refining and fine-tuning of
existing knowledge and competences. Though
exploitation, organizations learn to refine their
capabilities, apply their current knowledge, and
focus on current activities in existing domains
(Holmqvist, 2003). Exploitation includes, but it is
not limited to, those activities such as refinement,
production, efficiency, selection, implementa-
tion, and execution (March, 1991). The primary
emphasis is on control, efficiency, and reliability
or conformance to specification (Auh & Menguc,
2005). The returns from exploitation are typically
positive, proximate and predictable.
In the context of MNEs, exploitative learning
processes are especially critical. An effective
exploitative learning across geographically and
cultural boundaries is not a trivial matter. MNEs
are network firms by their nature. This means
that, in order to strengthen local competences,
they must be able to leverage their networks to
The Link between Learning Capability and Business Performance in MNEs

Table 1. Exploratory and exploitative learning

Exploration Exploitation
Definition Learning mechanism that entails the refinement and Learning mechanism that involves the variation and
extension of existing knowledge and competences regeneration of knowledge and competences
Outcomes New designs, new markets, new technologies Existing designs, existing markets, existing tech-
nologies
Knowledge base Require new knowledge and departure from exist- Build and broaden existing knowledge and skills
ing knowledge
Result from Search, variation, flexibility, experimentation, risk Refinement, production, efficiency, execution,
taking control

effectively provide their local subsidiaries with
dispersed knowledge. Regardless of these internal
mechanisms, the receiver (the local subsidiary)
must identify potentially important knowledge,
absorb it, and then exploit it to be able to react
as fast as possible to dynamic changes in relative
location advantages.
To put it somewhat simply, the benefit of ex-
ploitation is based on increased efficiency, while
the benefit of exploration is based on innovation.
Table 1 summarizes the main differences between
exploration and exploitation.
The Balance Between
Exploration Processes and
Exploitation Processes
Despite the differences between the two learning
processes, it is commonly stressed in the organi-
zational learning literature that, in order to learn,
organizations in general and MNEs in particular
need to achieve a balance between exploration and
exploitation rather than emphasizing one at the
expense of the other. As stated by March (1991,
p. 71) “Adaptive systems that engage in explora-
tion to the exclusion of exploitation are likely to
find that they suffer the costs of experimentation
without gaining many of its benefits. They exhibit
too many undeveloped new ideas and too little
distinctive competence. Conversely, systems that
engage in exploitation to the exclusion of explo-
ration are likely to find themselves trapped in
suboptimal stable equilibria”. It is true that, since
March (1991) disclosed the inherent challenges
of managing these contradictory processes, some
researchers suggest that the two forms of learning
are incompatible and firms need to make choices
that favor one form over the other (Barney, 1991;
Ghemawat & Costa, 1993). However, a good
number of studies argue that the most successful
firms are those able to reconcile both exploration
and exploitation and in so doing enhance their
long-term competitiveness (Tushman & O’Reilly,
1996; Katila & Ahuja, 2002; He & Wong, 2004;
Auh & Menguc, 2005). Arguments in favor of
both exploration and exploitation are thus well
established and accepted.
Although near consensus exist on the need for
balance between exploration and exploitation,
there is less clarity on how this balance can be
achieved. A fraction of theory identifies punctuated
equilibrium patterns involving a series of discrete
periods, each focused on exploration and exploita-
tion, as a mechanism to help MNEs to achieve this
balance. But most of the theoretical approaches
sustain a different continuous evolutionary solu-
tion, where the need for an appropriate balance
between exploration and exploitation has been
crystallized by Tushman and O´Reilly’s (1996)
conceptualization of the ambidextrous organiza-
tion. These authors argued that an ambidextrous
firm is one capable of operating simultaneously
to explore and explore its knowledge and com-
petences. The balance between exploration and

163
 The Link between Learning Capability and Business Performance in MNEs
exploitation is also implicit in the conceptualiza-
tion of dynamic capabilities by Eisenhardt and
Martin (2000), who suggested that overall dynamic
capabilities require a blend of the two different
learning logics, namely the logic of exploration
and the logic of exploitation. According to Knott
(2002), exploration and exploitation coexists in
Toyota, and the two are likely to be complementary
since it is non-optimal to combine them if they
are substitutes.
The notion of balance between exploration and
exploitation also reflects the resourced-based view
tenet that competitive advantage is a function of the
unique bundling of heterogeneous resources and
capabilities that increase the complexity and am-
biguity of organizational actions (Barney, 1991).
From this perspective, the balanced interaction
between exploration and exploitation reflects a
complex capability whose provides an additional
source of competitive advantage beyond those
provided by each one individually.
In the context of MNEs, exploration is obvi-
ously necessary in order to learn from foreign
markets, but it does not guarantee that the local
subsidiaries benefit from existing knowledge on
a larger scale. At this point, the problem MNEs
face is adapting their knowledge and business
practices to fit them to foreign environments. Si-
multaneously, it is also necessary that exploration
gets materialized in the operational systems of the
local subsidiaries, improving thus their activities.
Accordingly, MNEs need to find a model to al-
locate resources between both activities to achieve
a “synchronized capability” that leads to create
competitive advantage through the synergistic
effects of exploration and exploitation. Such a
model would probably be conditioned by the
type of industry, the nature of knowledge, and the
characteristics of the firm and its activity (Choo
& Bontis, 2002).
164
inTEllECTuAl CAPiTAl
As An EssEnTiAl
KnoWlEDGE REsouRCE
In the present economy, more and more business
based their value not on their tangible resources,
but on their intangible resources such as people
and their expertise, business processes, customer
loyalty, repeat business, reputation, and so forth
(Bontis, 2002). These kind of intangible resources,
which are a source of value to organizations, are
generally labelled as “intellectual capital”.
In defining intellectual capital, consensus
is far from achieved (Vera & Crossan, 2001).
Stewart (1997) defines intellectual capital as the
intellectual material –knowledge, information,
experience, etc- that can be put to use to create
value. Edvinsson and Malone (1997) refer to intel-
lectual capital as the possession of the knowledge,
applied experience, organizational technology,
customer relationships, and professional skills
that provide a company with a competitive edge
in the marketplace. Further, Brooking (1998)
argues that intellectual capital are combined in-
tangible resources which enable the company to
function. Nahapiet and Ghoshal (1998) define it
as “the knowledge and knowing capability of a
social community” (p. 245). There is no consensus
about the presence of knowledge (as cognition)
or knowing (as behaviour) in intellectual capital.
Another disagreement is about the inclusion of
intellectual property as part of intellectual capital
(Vera & Crossan, 2001). However, we can say that
intellectual capital, also called intangible assets
or intangible resources, are resources found in
knowledge. More specifically, intellectual capital
is knowledge resources, both tacit and explicit,
that can be converted into value (Edvinsson &
Sullivan, 1996).
The Link between Learning Capability and Business Performance in MNEs
Classification of Knowledge
Resources
If we consider intellectual capital as knowledge
resources that can be converted into value, it should
contain human knowledge as well as the knowl-
edge embedded in the organization’s structures,
processes, routines, systems, intellectual property,
and relationships with external stakeholders (Vera
& Crossan, 2001). In fact, most of the specialized
literature argues that intellectual capital consist of
human capital (i.e. the tacit knowledge embed-
ded in the mind of employees), structural capital
(i.e., the organizational routines, structures and
processes that contain the non-human storehouses
of knowledge) and relational capital (i.e. the
knowledge embedded in customer and supplier
relationships). The human capital is, in essence,
the intelligence of the organizational members
defined as a combination of factors such a genetic
inheritance, education, experience and attitude. It
is important because it is a source of innovation
and strategic renewal (Bontis, 2002). Structural
capital contains the knowledge resources that al-
low an organization to function in a coordinated
way, giving support to employees in their quest
for optimal intellectual performance and therefore
overall business performance. Its essence is the
knowledge resources embedded in the systems
and routines of the organization. Finally, relational
capital represents the potential an organization
has due to knowledge resources external to it,
such as knowledge embedded in relationships
with customers, suppliers, the government, or
related industry associations (Bontis, 2002). Due
to its external nature, it is difficult to achieve and
control.
MNEs that want to maintain a presence in
various geographically disperse and culturally
and politically distinct international markets must
have a substantially larger relational capital than
firms that operate on a more restricted basis.
Likewise, the coordination of oversees operations,
which must consider substantial variations in
time zones, organizational structures, and busi-
ness environments, also demands a well-built
structural capital.
In addition, as stated by Vera and Crossan
(2001), there is general agreement among scholars
that learning occurs and thus that knowledge re-
sources exist at the individual, group, organization-
al and inter-organizational levels. Furthermore, it
is possible to establish a parallelism between indi-
vidual and group knowledge resources and human
capital; organizational knowledge and structural
capital; and inter-organizational knowledge and
relational capital. Since the intellectual capital
literature do not explicitly address these assump-
tions about the individual, group, organizational
and network levels of analysis, the organizational
learning literature has gone further by providing a
theory that links the levels and explains the learn-
ing capability through the learning processes by
which knowledge resources at one level change
and become knowledge resources and learning
at another level. In order to understand the role
of knowledge resources –intellectual capital- in
MNEs’s success, it is thus important to integrate
the intellectual capital with research in the orga-
nizational learning domain.
Knowledge Resources and learning
Processes: The learning Capability
Numerous descriptions (Bontis, 1999; Decarolis
& Deeds, 1999; Dierickx & Cool, 1989; Vera &
Crossan, 2003) of the organizational potential
to learn are made by using the link between
knowledge resources and its associated learning
processes at the different levels of analysis. On
this matter, several authors (Crossan et al., 1999;
Diericks & Cool, 1989; Bontis et al., 2002) sug-
gest that, at a general level of analysis, intellectual
capital represents the knowledge resources that
exist in an organization at a particular point of
time. The way that intellectual capital (knowledge
resources) changes and evolves over time depends
on learning processes. Accordingly, it is possible
165
 The Link between Learning Capability and Business Performance in MNEs
to argue that all organizations uphold a stock of
knowledge resources which needs to continually
flow through learning processes to act in agreement
with the environmental requirements. Knowledge
resources compel all that is already known or needs
to be known, which includes knowledge at the
human, structural and relational levels. Learning
processes are more concerned with evolution and
interconnections. They are about the interaction
of knower(s) between themselves and with the
world (using knowledge resources as a tool). In
essence, learning may be considered, nor not just
as an individual, but as a social process developed
through the interaction of learners within specific
contexts (Brown & Duguid, 1991; Cook & Yanow,
1993; Nicolini & Meznar, 1995; Wenger, 1998).
It is also considered that learning processes are
the flows through which knowledge resources
are generated, retained, transferred and utilized
(Prieto, 2003). They are essential to understand
how knowledge resources are integrated and
translated into competence (Elkjaer, 2001; Grant,
1996). Learning processes employ knowledge re-
sources and result in new or modified knowledge
resources for making sense of the world and taking
action in it (Sanchez, 2001). Learning processes
and knowledge resources are then intertwined in
an iterative, mutually reinforced cycle (Bontis,
1999; Crossan et al., 1999; Nonaka & Takeuchi,
1995).
The link between learning processes and knowl-
edge resources is reflected in the tension between
the exploration and the exploitation of knowledge
(Crossan et al., 1999; March, 1991). MNEs renew
itself through the exploration processes and new
knowledge is created and assimilated (institution-
alized). At the same time, past knowledge guides
local subsidiaries, which produce the exploitation
of what is already learnt. The efficiency of learn-
ing depends on how exploration and exploitation
processes continuously to provide knowledge re-
sources to the MNEs and its local subsidiaries by
elaborating, supporting, and contradicting existing
knowledge resources (Bontis, 1999).
166
According to previous arguments, MNEs’
learning capability is composed of continually
evolving knowledge resources (human, structural
and relational) that flow through learning process-
es to continuously exploit and explore knowledge
resources in accordance with the environmental
conditions. Knowledge resources and learning
processes are so tightly intertwined that it may be
counter-productive to define learning capability
as dependent on either one or the other. Thus both
knowledge resources and learning processes must
be combined to define the learning capability of
any organization. In addition, MNEs that engage
in learning capability are more likely to recognize
the importance of cultivating and integrating the
varied knowledge resources from their different
foreign markets. Learning capability facilitates
the combination of new and different knowledge
resources with existing ones and thereby creates
superior performance. Learning capability also
compels managers to consider the knowledge
resources gained from the diverse local subsidiar-
ies, and to deliberate how to use it to overcome
deficiencies in the MNEs knowledge base.
Building on these assumptions about learning
capability, the next step is to relate it to business
performance. The theoretical distinction between
learning processes and knowledge resources is im-
portant in evaluating the contributions of learning
capability to business performance in MNEs.
lEARninG CAPABiliTY AnD
BusinEss PERFoRMAnCE
Past studies fail to arrive at a consensus about
the link between learning capability and business
performance (Crossan et al., 1995; Huber, 1991;
Popper & Lipshitz, 2000). In spite of divergences,
it is possible to find arguments to defend the idea
that learning processes and knowledge resources
may improve business performance. Even when
the link may be tenuous, Cangelosi and Dill (1965)
mention that improved business performance is
The Link between Learning Capability and Business Performance in MNEs
learning. Fiol and Lyles (1985) suggest that it is
possible to presume that learning will improve fu-
ture performance. Senge (1990) indicates that, over
time, superior performance depends on superior
learning. Other authors have also recognized the
importance of learning capability as beneficial to
overall business performance (Nahapiet & Gho-
shal, 1998; Soo et al., 2004; Stata, 1989; Stewart,
1997). Recent empirical efforts give support to the
impact of learning processes and different forms
of knowledge resources on performance (Bontis
et al., 2002; Decarolis & Deeds, 1999; Prieto &
Revilla, 2006; Davis & Daley, 2008; Olavarrieta &
Friedmann, 2008). Specially, knowledge resources
and learning processes have become increasingly
accepted in the international business literature
as pivotal strategic tools that differentiate firm
performance (Hsu & Pereira, 2008).
non-Financial Performance
and Financial Performance
The notion of a substantive link between learning
processes, knowledge resources and improved
business performance often relates the potential
effects to the economic and financial success. It
is possible, in fact, to use some kind of indicators
about the financial success. However, business
performance is a multidimensional concept, not
easily measurable, and more complex than the
financial ratios and indicators that are usually
applied to it. Therefore, the potential effects of
learning capability on business performance
cannot be determined exclusively by a financial
assessment. Effects also deal with the reaction
of others (e.g. customers, employees, etc.) to the
actions of the organization. This reaction will
be more favourable when the capability to learn
guides the identification and fulfilment of oth-
ers’ expectations along with the organizational
purposes. Hence, it is logical to suggest that both
financial and non-financial performance must
be assessed in order to evaluate overall business
performance resulting from learning capability
in organizations (Goh & Ryan, 2002; Zahra et
al., 1999).
This approach is consistent with the numerous
efforts to measure intellectual capital in organi-
zations (Kaplan & Norton, 1992, 1993; Martin,
2000; Stewart, 1997). This field has included
several discussions about performance measure-
ment by arguing that it is necessary to balance the
traditional financial valuation with a non-financial
valuation of business performance. The EFQM
Excellence Model also asserts that customers’
satisfaction, employees’ satisfaction, and impact
on society results are key to performance criteria
(what an organization achieves) that must be
considered together with financial performance
(EFQM, 2001). The Performance Prism model
by Neely and Adams (2001) is another example
that explicitly adopts a stakeholder centric view
of performance measurement together with more
traditional aspects of it. This stakeholder view
emphasizes the increased influence of customers,
employees and general society when evaluating
performance.
In reality, there is an essential way to enlarge
an organization’s financial performance, and it is
through the identification and satisfaction of mar-
ket demands and customers’ expectations (Neely
& Adams, 2001). At the same time, customers
want to gain knowledge of every transaction in
order to become well informed and self-reliant.
Hence, customers’ satisfaction relies on both
their perception and their diagnostic about the
organization’s activities, products or the value
of its service. Customers’ perceptions will be
improved by the extent to which an organization
develops its potential to create, deploy, and offer
them its active knowledge resources, in the form
of products, services and processes, which will
satisfy their needs, and will strengthen the estab-
lished relations. In other words, the organization
must use knowledge to provide a vital service to
its customers, making it harder for them to switch
to another supplier. Therefore, quality in products
and services will lead to customer satisfaction
167
 The Link between Learning Capability and Business Performance in MNEs
Figure 1. The link between the learning capability and business performance
and durability of the relationships, being then
only a question of time to gain a positive result
on financial performance.
These arguments reflect the central importance
of acquiring foreign country knowledge through
learning processes during the international ex-
pansion. When MNEs operate in disparate host
countries, they enhance their knowledge base. As
such, MNEs continuously strive to learn about
foreign countries and transfer their knowledge
across borders in the global marketplace. MNEs’s
ability to accumulate human, structural and rela-
tional capital during their international expansion
enhances their performance. Specifically, the
internationalization strengthen the explorative
and exploitative process, so that MNEs’ managers
should take full advantage of their local subsid-
iaries in foreign markets to better satisfy local
customers and improve performance.
In an attempt to organize previous arguments,
Figure 1 shows the essential relations between
learning capability and business performance.
Both learning processes and knowledge resources
are intertwined so that the former are decisive to
strengthen and manipulate knowledge resources
and, knowledge resources themselves are a basis
for the learning processes. This way, learning
capability can be sustained as a source of non-
financial performance through the creation of
value for stakeholders and, thus, as a decisive
168
channel for financial performance. Finally, it
is worth noting that business performance may
provide important feedback about the efficiency
of learning and, ultimately, it affects how an orga-
nization continues to learn as a long-lasting core
competency (Calantone et al., 2002; Dragonetti
& Roos, 1998; Mintzberg et al., 1995). In other
words, business performance is not an ultimate
consequence of learning capability, but may help
to discern the existence of a knowledge gap that
needs to be filled.
learning Configurations and
Business Performance: A Two
Dimensional Categorization
As stated earlier, both knowledge resources and
learning processes combine to create a learning
capability. Therefore, it is feasible to presume that
differences in the relationship between knowledge
resources and learning processes may produce
variations in the MNEs’ capability to learn. Con-
sequently, it may be suggested that, rather than
describing learning capability as a particular state
of knowledge resources and learning processes,
different configurations of learning capability may
exist as a result of the way knowledge resources
and learning processes interact. These configura-
tions may be transitional or not, but are the root of
distinctions in learning capability between MNEs
The Link between Learning Capability and Business Performance in MNEs
Figure 2. Combinative differences of the learning capability
(Gnyawalli & Stewart, 2003).
Despite its simplicity, Figure 2 highlights the
possibility of different combinations of knowledge
resources and learning processes that result in four
extreme configurations of learning capability.
Where there are low levels of both knowledge
resources and learning, there is a minimized learn-
ing capability. In the current turbulent business
environment, this configuration matches to MNEs
that barely change, and they are probably mature
or simply stagnated. This is a critical or recessive
situation that quickly reduces the effectiveness
of MNEs. MNEs belonging to this group do not
take full advantage of the internationalization.
In marked contrast to former situation is an ad-
vanced inclusive learning capability where there
are both large levels of knowledge resources and
learning processes. This characterizes a configura-
tion where the interrelation between knowledge
resources and learning processes balances the
potential to develop, maintain, apply, and improve
abilities, qualities and activities in such a way that
they become a source of sustainable competitive
advantage. In this case, MNEs understand the
importance of developing a learning capability
within and across local subsidiaries and wield
these knowledge base advantages effectively in
the global market.
Configurations with unbalanced levels of
knowledge resources and learning processes are
more difficult to describe. When there is a bias
towards high levels in learning processes, we
have a dynamic learning capability prompted
by the need to exploit temporary competences
that are rapidly substituted through knowledge
exploration. However, it is a risky situation that
produces only a limited opportunity to accumulate
permanent knowledge resources. Finally, when
learning capability is biased to large immobile
basis of knowledge resources there is a static
learning capability. This is possible in the case
of big and/or experienced MNEs, with a strong
tradition or with some kind of well-established
competitive advantage.
However, just knowing that organizations may
have different learning capabilities is not particu-
larly compelling. What makes this of interest is
that these divergences significantly and differen-
tially affect business performance. In this sense,
it is possible to assume that making sense and
understanding differences in learning capability
may have implications on what can be expected in
terms of performance outcomes. In other words,
different orchestrations in knowledge resources
and learning processes may have different effects
on business performance.
Prior literature suggests that the link between
learning processes and performance is more in-
direct that the link between knowledge resources
and performance (Crossan et al., 1995; DeCarolis
& Deeds, 1999; Prieto & Revilla, 2006). Learning
capability depends on the MNEs potential to use
available knowledge resources and to continually
renew those knowledge resources to fit global
market. Gaps between knowledge resources stored
from the past and knowledge resources required
169
 The Link between Learning Capability and Business Performance in MNEs
for acting in response to changing local market
conditions trigger learning processes to produce
new knowledge. New knowledge joins the exist-
ing basis of knowledge resources, so that it can
be used to fit market conditions. But contrasting-
with learning processes, which may be adjusted
automatically, knowledge resources cannot. The
shaping, reshaping, and deployment of knowledge
resources is a slow and gradual process, specially
in the context of internationalization. This is why,
as depicted in the dynamic learning capability of
Figure 2, it is feasible to find situations where
learning processes are being developed –especially
at the human level- while their outcomes are not
yet materialized in terms of effective knowledge
resources (it is even possible that knowledge is
never assimilated and retained). It is possible to
expect this situation to start producing positive
evaluations by stakeholders, but it is unlikely
that it will have a direct effect on financial per-
formance. Consequences of financial success are
not clear when it is failure that enables learning
processes (Cangelosi & Dill, 1965). Moreover,
learning processes may negatively impact finan-
cial performance in the short term when they
involve replacing familiar practices with new
and unfamiliar ways of operating (Crossan et al.,
1995). Considering that knowledge discarding
activities are also an important part of adding new
knowledge resources, slow unlearning is a crucial
weakness that well may obstruct the beneficial
influence of learning processes on performance
(Hedberg, 1981). Accordingly, it is reasonable
to assume that differences in learning capability
as a result of learning processes do not lead to
differences in business performance, especially
in terms of financial performance.
While nothing conclusive is apparent con-
cerning the contribution of learning processes to
improved business performance, the relationship
between the positive knowledge resources and
business performance has often been assumed
(Prieto and Revilla, 2006). The existence of knowl-
edge resources in MNEs implies that, together
170
with the specialized knowledge of individual
members, knowledge is efficiently integrated in a
complementary manner. It is when new knowledge
enriches existing knowledge resources that it will
lead to adjustments in the original knowledge, and
may lead to decide the MNEs’ competitive inten-
tions. Knowledge resources underpin the decisions
and competences needed to efficiently develop the
MNEs’ processes, products, and value of service
(Marr & Schiuma, 2001). From this position, the
static and the inclusive learning capability should
represent the most advantageous ones. A strong
basis of knowledge resources has been found to
increase efficiency in new product development
(Brockman and Morgan, 2003), organizational im-
provisation (Weick, 1993), recombination of prior
routines (Holland, 1975), and absorptive capability
(Cohen & Levinthal, 1990). In particular, it has
been argued that knowledge resources that are
valuable, rare, inimitable, and non-substitutable,
would lead to competitive advantage (Barney,
1991). And it is accepted that complementarities
appear between these knowledge resources and
organizational resources (Grant, 1996). This all
entails a potential to satisfy stakeholders’ expec-
tations better than competitors on a sustainable
basis. If stakeholders satisfy their expectations
about the MNEs, it is expected that it will fi-
nally lead to the MNEs’ financial enhancement.
Hence, knowledge resources provide awareness
of local customer’s needs and ways to serve the
foreign market, so they ought to be a significant
determinant of MNEs performance. Hence, it is
feasible that the differences in learning capabil-
ity as a result of knowledge resources do lead to
differences in business performance, especially
in terms of non-financial performance.
Finally, in addition to the absolute levels of
knowledge resources and learning processes, the
levels of interaction between them may be con-
sidered significant (Bontis, 1999; Prieto, 2003).
It is logical to presume that low levels in both
knowledge resources and learning processes, as is
the situation of the minimized learning capability,
The Link between Learning Capability and Business Performance in MNEs
do not lead to enhanced business performance. Ac-
cording to Bontis et al. (2002), MNEs with a learn-
ing capability involving a misalignment between
knowledge resources and learning processes may
even obtain negative consequences on business
performance. This would be the situation of the
dynamic learning capability and the static learning
capability. On the contrary, MNEs with a proper
alignment between knowledge resources and
learning processes, as is the case of the inclusive
learning capability, exhibit a learning capability
that may have a positive association with improved
business performance. In fact, this alignment in-
volves an MNE’s potential to shape knowledge
resources and to use them by learning processes
in such a way that it all continuously channels the
satisfaction of stakeholders’ needs –non-financial
performance- as a first step to improve the financial
returns. Learning processes are essential to avoid
knowledge resources to become ‘core rigidities’
(Leonard Barton, 1992), so that knowledge can be
sustained as a source of competitive advantage.
Hence, MNEs that properly combine knowledge
resources and learning processes exhibit a better
business performance, in terms of both non-
financial and financial performance
ConClusions
The main objective of this chapter is to emphasize
the relationship between learning capability and
business performance in MNEs. With this aim, the
chapter addresses different configurations between
knowledge resources and learning processes for
an improved business performance. Business
performance is valuated in both financial and
non-financial terms.
The essential proposition is that differences
in MNEs performance exist as a result of differ-
ences in learning capability. Most importantly, the
proper interaction between knowledge resources
and learning processes is considered critical to
obtain performance enhancements. In principle,
it is argued that learning processes by themselves
do not seem to lead to long-term success, and that
improved MNEs performance is in large derived
from knowledge resources. Learning processes
may occur, but it does not necessarily follow
that those processes will directly enhance MNEs
performance. If high levels of learning processes
take place together with low levels of knowledge
resources, it involves that there is learning not
being absorbed. Learning is thus being forgotten,
not allowing shaping and deploying an effec-
tive knowledge basis, and almost never yielding
profitability in the long term. Therefore, learning
processes can be considered a necessary but not
sufficient condition for improved and sustained
business performance. Improved business per-
formance largely lies in the knowledge resources
they create and mobilize. However, it must have
in mind that knowledge resources depreciate with
time, especially in international dynamic environ-
ments. Learning processes are then necessary to
strength and rebuild knowledge resources so that
the MNE may preserve its competitive advantage.
Therefore, knowledge resources may be a suf-
ficient condition to improve MNE performance,
but not to sustain that level of competence.
Previous assumption comes to say that to con-
tinually reinforce knowledge resources by means
of the appropriate paths of learning processes
is as important as possessing them at a certain
point as a basis to obtain an improved business
performance (Diericks & Cool, 1989). So, when
managing knowledge, MNEs managers must
not forget that it is the high levels of interaction
between knowledge resources and learning pro-
cesses that lead to achieve and to sustain positive
consequences on MNEs performance. An inbal-
ance may exist between knowledge resources and
learning processes, but this should be a transitional
position if MNEs are aspiring to build and rebuild
competitiveness. Learning processes depend
on past knowledge in its emergence and can be
adjusted nearly instantaneously. On the other
hand, knowledge resources emerge from learning
171
 The Link between Learning Capability and Business Performance in MNEs
processes, but cannot be adjusted instantaneously.
In this sense, it is important to keep in mind that
knowledge resources may result not only from
parent company’s learning processes, but also from
the assimilation of local subsidiaries knowledge.
This last point depends on absorptive capacity of
the local subsidiaries, which is largely intertwined
with learning capability since both relate knowl-
edge resources and learning processes, and relate
these variables to the creation and sustainability
of competitive advantage.
Finally, it is worthy mention that it would be
possible to presume that improvements on finan-
cial performance are seemingly preceded by im-
provements on non-financial conditions related to
customers’ satisfaction, organizational reputation,
and employee satisfaction. Hence, managers must
also realize that the reaction of others (customer,
employees, etc.) to the organizational activity is as
important as the realization of superior financial
performance. Indeed, how the market and people
perceive the value of an organization’s products,
services, and processes is required to strengthen
established relations and to enlarge the economic
value produced by organizations.
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176
 Section 3
Implementation
178

Chapter 11
Managing Corporate
Responsibility to
Foster Intangibles:
A Convergence Model
Matteo Pedrini
Altis – Postgraduate School Business & Society, Italy

ABsTRACT
This paper presents a model for the integrated management of Corporate Responsibility (CR) initiatives
and intangible resources. The model defines an approach for structuring a company’s social efforts
(stakeholder management) in such a way as to increase competitiveness through the development of the
intangible resources. After having presented an analysis of the studies conducted on the benefits of CR
initiatives on the development of intangible resources, the text proposes a protocol to evaluating each
CR initiative according to the model.

inTRoDuCTion fied in time (Freeman 1984). Springing from that

The growing importance of Corporate Responsibil-
ity (CR) dates back to the 1970s, a time in which
debate surrounding it began to gradually involve
society as a whole.
Initially the conflict of interests was between
believers in an economic formula that limited the
responsibility of corporations solely to the maxi-
mization of profit (Friedman 1962) and promot-
ers of a new business concept that extended the
responsibility of corporations to results of a social
nature, an idea which was only completely codi-
DOI: 10.4018/978-1-60566-679-2.ch011
idea, over time the following schools of thought
were established:
• the sustainable development spread globally
by way of the Bruntland Report (1987) and
was affirmed in the successive UN summit
held in Rio de Janeiro (1992). In particular,
studies to that end attempted to comprehend
how corporations could operate in order to
guarantee that “the needs of current genera-
tions are met without comprising the abil-
ity of future generations to meet their own
needs” (World Commission on Environment
& Development 1987, p. 43);

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Managing Corporate Responsibility to Foster Intangibles
• the corporate citizenship theorized the rec-
ognition of corporate responsibilities in
line with the role that a company plays as
distributor of civil and social rights not to
mention facilitator of the diffusion of rights
of a political nature (Matten, Crane 2005);
• the corporate responsiveness claims that
«being responsive enables organizations
to act on their social responsibilities with-
out getting bogged down in the quagmire
of definitional problems that can so easily
occur if organizations try to get a precise
fix on what their true responsibilities are
before acting» (Carroll 1979, p. 502);
• the social contract is based on the hypoth-
esized existence of a contract between a
corporation and society, in which the com-
pany concerns itself with responding to
social pressures receiving in exchange so-
ciety’s approval to operate (Scconi, 2006).
The company therefore must demonstrate
that its operation: «reflects a positive nor-
mative evaluation of the organization and
its activities, a prosocial logic that differs
fundamentally from narrow self interest»
(Suchman 1995, p. 579);
• the corporate social performance consid-
ers business performance in the light of the
existence of responsibility (Wood 1991).
Such a model appeared incapable of fully
merging the existence of ethic and moral
values in corporate decisions with respect
for the principles of economic rationality
into a single theory (Swanson 1995).
It is the aim of this paper to supply a contribu-
tion to the last school of thought: corporate social
performance. It suggests a new approach to the study
of social performance, in particular to the analysis of
the existing connection between it and the financial
performance of a company. The intention is therefore
to demonstrate how the adoption of an instrumental
approach to CR initiatives results in a competitive
advantage that results in financial improvement.
BACKGRounD
The relationship that exists between the protection
of the shareholders’ economic interests (bottom
line) and the extension of corporate responsibility
to other stakeholder has been widely investigated,
so much so that in time a mass of empirical stud-
ies was constructed having been accumulated
in the attempt to respond to a twofold question:
what relationship binds the social and financial
performances of a company? Is the relationship
negative, neutral, or positive?
Lee E. Preston and Douglas P. O’Bannon
(1997), referring to the mass of studies conducted,
identified four different categories of interpretation
for such a relationship: (1) financial performance
as an independent variable; (2) social performance
as an independent variable; (3) the existence of
a relationship of reciprocal influence; (4) the
absence of a relationship.
1. The first group of studies concluded that
CR initiatives positively influence financial
performance, suggesting that the financial
performance was subject to a dependent rela-
tionship. These studies pointed out a positive
connection in certain cases and a negative
one in others. Two distinct motives were
given in support of the existence of a posi-
tive relationship. The first is the existence of
society’s ability to influence a corporation,
justifying the financial performance’s depen-
dence on the social performance as related to
the ability of stakeholders to influence and
be influenced by the corporation (Cornell,
Shapiro 1987). The second is the capabil-
ity of management, as the prime support of
the existence of a positive relationship, in
obtaining optimal results in a social, envi-
ronmental, and economic sense. At the same
time, the studies that identified a negative
relationship sustained their ideas referring
to the theory of arbitration. This theory
states that the assumption of responsibility
179
 Managing Corporate Responsibility to Foster Intangibles
by a corporation leads to inefficient use of
corporate resources that could result in a
more successful financial performance if
invested in productive activities (Aupperle,
Carroll & Hatfield 1985).
2. Although it was not widely circulated, a
second group of studies proposed the social
performance as a dependent variable. In
that vein of studies, two explanations were
made in support of the existence of a positive
relationship: first, the excess of resources,
which favours the generation of discretionary
power in the use of the exceeding resources,
making it possible therefore to use them to
increase stakeholder satisfaction resulting in
improved social performance (Kraft, Hage
1990); and second, the stability of the orga-
nization manifested in companies capable
of maintaining good financial performance
which can more easily pay heed to demands
of a social nature allowing management to
dedicate more time to satisfying the expec-
tations of stakeholders beyond the limits
imposed by the law (McGuire, Sundgren
& Schneeweis 1988). The prevalence of
self-interest with respect to company ob-
jectives was given as support in the studies
maintaining that the financial performance
negatively influences social performance. It
was observed how the personal goals of man-
agement can present elements that conflict
with the interests of a company, explaining
therefore the existence of inefficiency tied
to company costs (Williamson 1985). In
the case in which the financial performance
produced is unsatisfactory, management is
led to justifiably forego potentially damag-
ing investments of a social nature with the
aim of improving the short term financial
performance, the principal criteria by which
the quality of their conduct is evaluated.
3. A third vein of studies examined the existence
of a reciprocal relationship between social
and financial performance. According to
180
this approach, the relationship between the
two dimensions is based on the existence of
a complex of synergies, and, consequently,
the character of the relationship depends on
the prevalence of the positive or negative
effects associated with it. Therefore, the
relationship is positive when the interactions
between the two performance types display
a prevalence of positive over negative ef-
fects, and vice versa, therefore, if negative
synergies are prevalent then the relationship
will be negative (Waddock, Graves 1997).
In this sense the CSR consists in the extent
to which a firm internalize non-market costs
(Heal 2005). Companies may behave in a
socially responsible manner because they
anticipate benefiting from these actions. So
the results of the relationship between social
and financial performance depends on the
difference between social costs internalized
and benefits achieved in term of higher ca-
pability to manage stakeholders (Coombs,
Gilley 2005).
4. One last category of contributions to the
theory of the existing tie between the social
and economic performances, which pre-
sented a limited number of empirical studies,
proposed the hypothesis of the absence of
a causal connection (McWilliams, Siegel
2001), and therefore a neutral relationship.
A model based on the supply and demand
of responsibility was given as the support
for the absence of the relationship. The
theory presented is based on the fact that,
in a microeconomic dimension, investments
connected to the assumption of responsibil-
ity are carried out in order to respond to
existing demand on the part of stakeholders
for such initiatives. A company’s effort to
achieve positive social performance does
not relate to the financial performance ob-
tained. From this perspective then, the two
performance types are independent of each
other. According to the authors, the level
Managing Corporate Responsibility to Foster Intangibles
of social performance is correlated to the
intensity of the demand for assumption of
responsibility on the part of companies: there
where stakeholders manifest an increasing
demand for social performance, it is possible
to observe a determined effort of a company
towards some theme, but once social demand
lessens, company efforts also decrease.
Despite the studies conducted through the
years that allowed for greater awareness of the
relationship existing between social and economic
performance, a degree of confusion still persists as
to the nature of such a relationship, accentuating
the necessity for an authentic perspective on all
the studies conducted. The most detailed attempt
towards such a perspective was conducted by
Joshua D. Margolis and James P. Walsh (2003),
who analyzed the empirical evidence of 122 studies
conducted from 1971 to 2001. The analysis con-
ducted shows how fifty-nine studies sustained the
theory of a positive association, thirty supported
the existence of a neutral relationship, while only
seven concluded a negative one. Therefore, the
majority of the studies furnished proof to support
the concept of a positive relationship between
social and economic performance. Marc Orlitsky,
Frank L. Schmidt, and Sara L. Rynes (2003), later
developed a critique of the Margolis and Walsh
study founded on the inadequate consideration
attributed to the methods of analysis used in the
synthesized studies, so much so that it appears
to also include studies of contestable results
using statistical methodologies that can lead to
miscalculations. The authors analyzed a part of
the literature used by Margolis and Walsh and
corrected the results in light of the methodological
errors identified. The analysis observed how the
majority of studies that demonstrated a negative
relationship presented problems of a methodologi-
cal nature limiting the weight of their findings,
in particular because of excessive residual vari-
ances. In addition Orlitsky, Schmidt, and Rynes
maintained that the explanation for different
results obtained in the study of the relationship
between social and financial performance can be
derived from the various research methodologies
employed and the use of performance indicators
that differ substantially from study to study.
The debate around environmental responsibil-
ity began in the 1970s, as governments increas-
ingly focused on environmental issues related to
industrial operations. Industry topics of social
concern have evolved over time focussing on
different aspects. Initially the attention was on
emission to water and air (1970s), then on re-
cycling and chlorine bleaching (1980s) and on
forestry and forest management, and forest (1990s)
certification and, in recent year, on global climate
change (Panwar et al. 2006). In response to these
environmental issues of public concern, the firms
has developed a renewed focus on sustainable use
of natural resources and prevention of climate
change through energy efficiency and the reduc-
tion of pollutant emissions. In this way a large
number of firms are engaged in environmental
management, often by adopting standards or
management system (i.e. ISO 14001). Nowadays
the environmental management issue of the most
relevant issues a top-manager has to face and a
lot of studies were done on the relation between
operations and environmental responsibilities. So
discuss about the Corporate Responsibility means
deal with social, environmental and financial
performance.
Starting from the compilation and its critique,
the following paragraphs furnish a contribution
to the studies with regard to the hypothesis of a
relationship of reciprocity between the different
performance types. A new functional approach
is presented in order to demonstrate how the as-
sumption of responsibility can lead to improved
financial performance if directed at maximiz-
ing the creation and development of intangible
resources.
Before diving into the study of the existing
relationship between CR and intangible resources,
it is useful to clarify to which realms this second
181
 Managing Corporate Responsibility to Foster Intangibles
category refers. The many studies of intangible
resources do not seem to have led to the acceptance
of a common definition, but they have certainly
allowed researchers to determine a series of charac-
teristics that in time came to be recognized by both
the academic and entrepreneurial communities.
By now, it is common to identify the intangible
resources by the following characteristics:
• the lack of tangibility, that represents the
primary characteristic of such resources,
and is the cause of the majority of prob-
lems management encounters in the moni-
toring of such resources;
• the presence of probable future profits, in
as much as intangible resources « are the
real source of competitive power and the
key factor in corporate adaptability for
three reasons: they are hard to accumulate,
they are capable of simultaneous multiple
uses, and they are both inputs and outputs
of business activities » (Itami, Roehl 1987,
p. 12);
• the possibility of monitoring by the com-
pany, since this same characteristic of in-
tangible resources is connected to the pos-
sibility of control of goods.
THE inTEGRATED APPRoACH
The study of existing synergies between CR and
intangible resources represents a new perspective
on interpreting the relationship between social and
financial performances since it views intangible
resources as a variable on the relationship (Molteni
2004). The integrated management model upholds
that CR initiatives can influence the wealth of
intangible resources and thus, can positively influ-
ence a company’s financial performance, through
variation of that wealth.
The new model is useful for promoting the
inclusion of CR related initiatives into the range
of tools used to increase competitiveness, given
182
their capacity to develop resources that primar-
ily contribute to it. This is a new paradigm in the
management of business activities as well as in the
interpretation of connections between social and
financial performances. In this model, CR initia-
tives are an integral part of the structure needed
to sustain the performances, as they make up the
basis for the company development potential.
Specifically, these initiatives act as the pillars of
a temple, and as such, they sustain the architraves:
the intangible resources. Thus, implementing CR
initiatives means setting the conditions to guaran-
tee positive financial performance in the future.
CR initiatives
The initiatives a company undertakes to satisfy
stakeholders’ expectations beyond the precepts
of the law and as expressions of a management
that respects the principles of fairness in both
value creation and distribution fall under the
heading of stakeholder management. Following
this model, every company should develop a CR
initiative system consistent with the intangible
resource wealth it intends to build and its existing
relationships with stakeholders. Consequently, the
initiatives undertaken within this system are often
creative and represent original solutions. This
characteristic is at the heart of CR proliferation
over the years, transforming the landscape of CR
practices focused on the assumption of corporate
responsibility in a broad sense, making it highly
varied. It would be difficult, if not impossible,
to present an exhaustive list of initiatives that
relate to corporate assumption of responsibility
in a broad sense. Facing this difficulty, it seems
appropriate to trace CR initiatives back to a set
of themes, before focusing on the explanation of
the model’s basic connections. Every initiative,
though it has an impact on the totality of company
stakeholders, concentrates its effects on certain
prevalent categories. So it can be affirmed that
every stakeholder management practice has an
orientation given by the prevalence of certain
Managing Corporate Responsibility to Foster Intangibles
effects. Based on this assumption, it is possible
to divide stakeholder management activities into
three categories, which vary according to their
prevalent orientation towards:
• satisfying the expectations and requests of
internal stakeholders, whose main areas of
concern are linked to themes of company
welfare and the expansion of the corporate
governance system;
• satisfying the expectations and requests
of external stakeholders, whose predomi-
nant areas of interest can be identified in
the development of a social accountability
system, in the management of community
relations and in activities of socially re-
sponsible investing;
• developing productive processes expressed
through the implementation of company
management systems, which have the ob-
jective of integrating attention to internal
dynamics with the operating processes
while assuring ethical and social correct-
ness of the supply processes.
Following are the explanations of the main
initiative areas leading back to every orientation
identified, along with the explanation behind each
initiative categorization. Every CR initiative can
thus be traced back to one of the following areas:
(1) company welfare; (2) corporate governance;
(3) social and ethical accounting; (4) corporate
philanthropy; (5) socially responsible investing;
(6) environmental management; (7) ethical supply
chain management.
1. Company welfare consists in a structure of
initiatives that offer collaborators a series of
services that go beyond those required by
current regulations. For example, company
welfare programs can cover topics such as:
workplace security, workers’physical health,
supplemental insurance or pension offers,
work-related stress management, spread of
awareness on smoking-related problems, or
more generally, activities focused on increas-
ing or safeguarding the workers’ well being.
The development of such activities should be
carried out while taking into consideration a
series of factors that significantly influence
the programs’ efficacy, including (Davis,
Gibson 1994): company size, history of the
company, service and resource availability,
the unionization rate, the organization’s
administrative structure, the existence of
processes which allow the correct identifi-
cation of personal and collective workers’
problems.
2. The introduction of a stakeholder view in a
company requires the rethinking of interests
within the corporate governance system.
This change renders the goal set in tradi-
tional systems obsolete: that is, assuring the
(main) shareholders an adequate safeguard-
ing of their investments by the managers
(agents) (Schleifer, Vishny 1997). The CR
approach suggests that the groups towards
which a company is responsible and whose
interests define its management include
many other groups than simply the share-
holders (Hemphill 2004). The extension of
corporate responsibility leads the corporate
governance system to evolve from a tradi-
tional principal-agent relationship to new
guidelines based on a company-stakeholder
relationship. Companies are pressed to rede-
sign the corporate governance system, with
the objective of considering the stakeholders’
expectations. This inclusion can take place
through a representative democratic system
– based on the introduction of worker rep-
resentatives in decision making bodies – or
through participative democracy – where
stakeholders are involved in the broader
decision making process (Mintzberg 1983).
The broadening of the corporate governance
system is manifested through company
introduction of tools such as ethical codes,
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 Managing Corporate Responsibility to Foster Intangibles
internal social auditing systems, ethical
boards, or through the development of
highly innovative tools created to respond
to specific company requirements.
3. Social accounting includes all activities
encompassing the collection and successive
communication of independent evaluations
as to financial, social, and environmental
performances (Elkington 1997). In practice
social accounting is «the preparation and
publication of an account about an organi-
zation’s social, environmental, employee
community, customer and other stakeholder
interactions and activities, and, where pos-
sible, the consequences of those interac-
tion and activities» (Gray 2000). Social
accounting allows for the establishment
of a communication process focused on
educating stakeholders and implementing
a democratic participation system in the
company (Owen et al. 2000). The activity
is based on a performance indicator system,
but its true purpose is that of encouraging
dialogue in order to improve stakeholders’
perceptions of the importance given to the
company’s direct and indirect impact on
stakeholders’ areas of concern (O’Dwyer
2005). The ultimate goal of social accounting
is to offer a method by which stakeholder
expectations are discussed and considered in
company decisions (Ball 2004, Kerr 2004),
thus allowing increased participation in the
company’s operation (Thomson, Bebbington
2005, Unerman, Bennett 2004).
4. Stakeholder management systems find sig-
nificant expression in initiatives carried out
in the local community, specifically in the
form of donations and philanthropic-type
activities performed by a company. Those
activities represent a discretional corporate
responsibility acceptance, which does not
only materialize in the unequivocal transfer
of wealth, in money or otherwise, from the
company to the local community (Kotler,
184
Roberto & Lee 2002). The philanthropic-
type activities can also contribute to the
creation of advantages for the company
through the so-called strategic philanthropy
(Post, Waddock 1995). This denomination
represents the aim to establish an interpre-
tation of community-oriented stakeholder
management activities which distance them-
selves from wealth redistribution operations
(Margolis, Walsh 2003) and move towards
the achievement of increased company com-
munity involvement, and thus versus a win-
win operational paradigm (Elkington 1994).
To achieve positive community relations,
companies can: publicize the philanthropic
initiatives undertaken, in order to boost the
benefits in terms of reputation (Fombrun
2005, Levy 1999); manage philanthropy
so as to obtain advantages regarding a dif-
ferentiation of the company position (Porter
2003, Porter, Kramer 2002) or to create new
business opportunities thanks to the devel-
opment of new services or products (Smith
1994).
5. It is possible to define socially responsible
investing (SRI) as the process of integrating
personal values and social concerns into in-
vestment decision-making. During the 90s,
SRI involved a growing number of compa-
nies and persons, and began to represent a
widely valued investment opportunity (Sethi
2005, Stone 2000). For a company, SRI
specifically means realizing activities that
allow it to cope with two challenge areas: one
regards financing and consists of the need
to meet responsible investors’ requirements
and thus attract capital investments following
ethical and social criteria (Schueth 2003);
the other challenge regards investment – in
concrete terms, the necessity of assuring
that the company’s portfolio of businesses
participations is aligned with ethical-social
criteria, whilst assuring promising invest-
ment profitability (Ahrens 2004).
Managing Corporate Responsibility to Foster Intangibles
6. The acceptance of wide-ranging company
responsibilities also leads to an evaluation
of the effect its production has on the envi-
ronment. Responsible companies are mo-
tivated to develop strategic environmental
management activities: a system that allows
the assumption of corporate responsibility
regarding the environmental effects of its
production with the goal of matching the
increased attention to environmental needs
that now characterizes consumers (Orsato
2006). The target of environmental man-
agement systems is thus to alleviate clients’
environmental concerns, and consequently
to access clients with particularly high
attentiveness towards the environmental
aspect of the services or products offered
by a company, thus creating a differentiating
advantage that would be difficult to imitate
(Reinhardt 1999). The systems mentioned
contribute to the company’s environmental
sustainability and to the positive effects that
an improved environmental performance
creates on a company’s competitiveness
(Cohen, Fenn & Naimon 2000, Christmann
2000, Dowell, Hart & Yeung 2000).
7. Management of the production line cur-
rently needs to face regulatory and consumer
pressures, since social and environmental
dimensions are implicated in supplier rela-
tions. Thus, stakeholder management can
be realized as an activity within the supply
chain, which – when directed towards a re-
sponsible management system – integrates
environmental and social dimensions into the
processes that assure the efficiency of deliv-
ering the right product at the right moment
(Jamison, Murdoch 2004). Development
of responsible management of the produc-
tion process system entails a revision of the
operational processes, of the objectives and
the criteria to ensure that supplier relations
are handled conscientiously (Mamic 2005).
The development of the aforementioned
system leads to a rethinking of the supply
chain and mainly leads to the consideration
of ethical and social criteria when choosing
suppliers. Therefore, the company works to
ensure that the supply operations are able
to: guarantee the efficiency of the supply-
ing processes; permit the company to take
on indirect responsibilities tied to supplier
behavior (Jamison, Murdoch 2004).
The intangibles
The core element of the integrated approach con-
sists in maintaining that the attention given to the
social dimension in stakeholder relations during
the development of the productive process can
and should uphold the support beam of company
performance: the intangible resources. The CR
initiatives should thus be chosen and implemented
with the perspective of favouring the develop-
ment of at least one of the cardinal elements of
intangible resources. A broad discussion about
what are the different components of IC took
place in the last years. A first construct posits IC
in a two-level construct (Sveiby 1997): human
capital, definite as the knowledge created by and
stored in a firm’s employees, and structural capital,
defined as the embodiment, empowerment, and
supportive infrastructure of human capital. Then
the structural capital is divided into organizational
capital, that includes the knowledge created by and
stored in a firm’s information technology system
and processes, that speeds the follow knowledge
through the organization) and customer capital,
that are the relationships that a firm has with its
customers (Edvinsson, Malone 1997). The cus-
tomer capital was also discussed as one aspect of
relational capital, the capital that encompasses all
external relationships (Bontis, 1996). This view
is similar to that referred to as external social
capital by sociologists (Bourdieu, 1985; Burt
1992; Coleman 1998) and management theorists
(Abler and Kwon, 2002; Nahapiet and Ghoshal
1998; Pennings et al. 1998; Stewart 1997; Yundt
185
 Managing Corporate Responsibility to Foster Intangibles
et al 2004). Finally the proposed classifications
of intangible resources agreed on the existence
of three cardinal elements:
• the human capital, which implies all of the
immaterial resources not incorporated in
the company, but who are present anyway
as the individuals who work within it. This
capital can disappear the moment an indi-
vidual decides to quit his cooperation with a
company. Thus, the company does not own
this capital, but it may include it among its
resources as a consequence of a worker’s
choice to perform for the company. This
category includes dimensions such as em-
ployee motivation and involvement, com-
petency and ability of the people working
within the company, and the overall shared
company environment (Sveiby 1997).
• the organizational capital, results from ac-
tivities that have the effect of transferring
knowledge and competence from workers
to the company, allowing it to acquire own-
ership thanks to knowledge that is trans-
formed from tacit to explicit. This capital
is independent of individual workers and
thus, even if the working relationships end,
it remains available to a company. This
category is further subdivided into two cat-
egories: the totality of company processes
and the activities of innovation and devel-
opment. The totality of company processes
is the combination of information avail-
able to a company, strategically speaking
– including the company mission; the main
economic-social positioning features; the
awareness of the competitive advantage
maintained in the past and to be maintained
in the future, as well as activities necessary
to encourage and expand it – in activities
carried out cooperatively, and the product
and service portfolio offered by the com-
pany. Generally speaking, the idea is to
use the processes to identify the methods,
186
procedures, and operational systems, which
together have the objective of positioning
collaborators to effectively apply compe-
tence and ability in order to produce value.
Innovation and development activities, on
the other hand, include initiatives aimed at
modifying the specialization level of the
company, improving operational process-
es, developing new products/concepts for
company implementation, and carrying out
sales and marketing activities.
• the relational capital, gathers the company
relations and collaborations held with in-
dividuals and organizations outside of the
company. This includes four sub-catego-
ries: the value of customer relations, the
value of the relations with suppliers, the
value of company-investors relations, and
the value of the relations with all other in-
terest holders present in the context, gener-
ally referred to as network relations.
The commitment to CR initiatives, thanks to
the resulting development of intangible resources,
allows a company to benefit from the improve-
ments in financial performance that such resources
generate. In fact, intangible resources are marked
by a heightened capacity of generating value when
compared to other resources. This capacity is
explained by certain economic properties which
characterize them (Lev 1999):
• scalability, since the principle of competi-
tive usage is not applicable to intangible
resources given that the use of a resource
by one individual or organization does not
exclude its use by another. This charac-
teristic entails that once the development
of an intangible resource has been estab-
lished, the only limitation to its use are
set by the dimensions of the market itself
(Romer 1998), thus allowing a company
limitless possibilities in generating value
from a single intangible resource;
Managing Corporate Responsibility to Foster Intangibles
• possibility of obtaining growing economic
returns, since the “knowledge is collec-
tive, every idea is based on the idea pre-
ceding it, while machines wear and need
to be changed. In this sense, every dol-
lar invested in knowledge brings about a
positive contribution to earnings, while a
good three quarters of private machinery
and equipment investments are needed just
to cover their depreciation” (Grossman,
Helpman 1994, p.34). This possibility can
be fuelled by four factors (Teece 2000):
the creation of standards, since the stan-
dard’s owner reaps larger advantages
in the growth of the organizations or the
people that have adopted that standard; the
so-called customer lock-in phenomenon
(Farrell, Shapiro 1988), since the consum-
er acceptance of a standard heightens the
transaction costs from one technology to
another, thus creating an entrance barrier
for new technologies; the high impact of
development costs; knowledge economies,
since increased knowledge favours the pro-
ducer, who accumulates experience within
a specific category of goods and can thus
take advantage of the acquired experience.
• imitation difficulty, fuelled by three differ-
ent phenomena: casual ambiguity, since
the cause and effect relationship that al-
lowed for immaterial resource develop-
ment is difficult to replicate; path depen-
dency, since the development of intangible
resources generates a process of knowl-
edge accumulation, which makes it so
that the obtainable results are influenced
by and dependent on choices made previ-
ously; time compression, because intan-
gible resource development requires a long
period of time, thus discouraging imitation
(Liebowitz, Margolis 1999);
• the relevance of the network effect, which
expresses its potential if an initial control
of the network is gained, so that the poten-
tial users, seeing the benefits for current
members of the network, decide to join,
further incrementing the positive returns
(Shapiro, Varian 1999). However, observa-
tions show that “the centre of an important
network holds an innovation, which was
further developed and transformed into a
product or service, whose ownership rights
are guaranteed by patents, brands or by
a strong name” (Lev 2003, p. 34). Often
the availability of an immaterial good is
characterized by a cycle, which includes
the creation of an idea, its production, and
network control. Therefore, intangible re-
sources open up the possibility of taking
hold of the centre of a network thus offer-
ing advantages connected to growing re-
turns of a network.
Within the scope of the model, CR initiatives
should be undertaken as useful ways to profit
from the results of intangible resources: scal-
ability, increasing returns, difficult imitation and
the network effect.
But which are the relationships that link CR
initiatives targeted towards stakeholders and
processes with the development of the three in-
tangible resource dimensions? How do the three
pillars encourage the development of intangible
resources and thus assure the company’s long-term
competitiveness?
Following is a detailed relation of this engine
of change, including a discussion of the combined
synergies that link the social dimension with
that of intangible resources, also in light of an
analysis of theoretic studies investigating those
relationships.
187
 Managing Corporate Responsibility to Foster Intangibles
THE FunDAMEnTAl
RElATionsHiPs in THE MoDEl
Before describing the relationships that constitute
the model, it is useful to point out how the correct
application of the new paradigm requires adapta-
tion of the model to fit each corporation in which
management intends to develop a joint strategy
between assumption of responsibility and devel-
opment of intangible resources. Each practice of
CR could produce different levels of benefits in
each corporation, as related to the usefulness of the
intangible resources generated for the strategy and
the nature and quality of the relationships main-
tained with the stakeholders. Given the diversity
that characterizes corporations, the purpose of
this paper is to propose a model that specifies the
potential synergies that link up the activities of
stakeholder management, the generation of intan-
gible resources, and, subsequently, the financial
performance. The goal is to draw attention to the
benefits available to a company and to propose the
assumption of responsibilities in a form coherent
with the win-win model in which benefits gener-
ated for society as a whole are also advantageous
to a company. After that, the paper will proceed
to an analysis of the ways in which each pillar of
the model sustains the development of intangible
resources, and, therefore, the competitiveness of
the company. Figure 1 shows a map of the overall
complex of ties that bind the different elements
that make up the model.
CR Activities, Human Capital,
and Financial Performance
The activities aimed at satisfying the demands of
employees beyond the standards required by law
are positively related to the development of human
capital. In fact, the realization of activities in the
best interests of employees allows management
to obtain:
188
• increased motivation and involvement of
the personnel;
• improvement in the overall effectiveness
of the company;
• enrichment in office environment.
Stakeholder management activities directed
prevalently at the internal company structure,
demonstrate attention to non-economic appeals
resulting in an increased sense of belonging
and employee motivation (Drumwright 1996).
The establishment of a positive opinion of the
company appears to present a positive relation-
ship with employee loyalty to the company.
Confirming the aforementioned relationships,
some studies pointed out how the companies that
satisfy employee requests beyond standards set
by law have a turnover rate lower than those that
do not utilize such methods (Greening, Turban
2000, Krackhardt, Hanson 1993). The positive
relationships between the implementation of
stakeholder management activities directed at
the internal company structure and the level of
employee motivation is upheld by studies that
demonstrated how in responsible companies em-
ployee behaviour motivated solely by self-interest
is less present (Dyne, Graham & Dienesch 1994,
Schein 1999) favouring the existence of an align-
ment between corporate goals and stakeholder
behaviour (Gottschalg, Zollo 2007).
Attention to the non-economic expectations
of the employees also allows for an expansion
of competencies available to the company (Hess,
Rogovsky & Dunfee 2002). This connection finds
justification in the ability of companies attentive to
the needs of employees to attract highly qualified
persons, placing the company in such a position
as to acquire the finest honed competencies avail-
able in the job market (Backhaus, Stone & Heiner
2002). Empirical evidence has demonstrated how
such attractiveness represents an advantage for
companies especially in periods during which
Managing Corporate Responsibility to Foster Intangibles
Figure 1. The relationships in the model
the job market is subject to intense competition
(Albinger, Freeman 2000). Another factor that
supports the ability of CR initiatives to improve the
competencies available to a company is observable
in the attention responsible companies pay to equal
opportunity between employees. Attention in this
area leads to the establishment of human capital
marked by an increased variety of personalities,
experiences, and management styles. The pres-
ence of such increased variety allows a company
to benefit from an elevated degree of creativity,
resulting in a extremely valuable human capital
(Edvinsson, Malone 1997).
A third advantage gained through activities of
stakeholder management aimed primarily at the
people within the company structure is a more
collaborative office environment. (Paine, Organ
2000). Activities that demonstrate a company’s
attention to non-economic appeals accentuate
the importance employees give to satisfying the
requests of other stakeholders and environmental
conditions. Generally speaking, such activities
favour the development of adaptability on the part
of employees (Katz, Kahn 1966). Likewise, the
amplification of the collaborative dimension in
the office environment allows for improvements
in the efficiency of inter-functional work groups
(Hatten, Rosenthal 1999) as well as in groups
which share resources and competencies between
various company departments (Gabbay, Zucker-
man 1998, Tsai, Ghoshal 1998). A collaborative
working environment favours the intensification
189
 Managing Corporate Responsibility to Foster Intangibles
of employee contributions to strategy formation.
Since employees are more advantageously posi-
tioned than top management to be able to identify
and correct company problems (Wright et. Al
1999), their contributions favour the development
of strategies that allow for an improved market
position (Azzone, Noci 1998, Handfield et al.
2001, Polonsky et al. 1998).
The progress observed in human capital through
activities of stakeholder management directed at
the internal company structure, specifically in the
employment of such increased capital in manage-
ment, allows for advancements in the financial
performance of the company first and foremost in
terms of productivity (Estes 1996, Korten 1995,
Makower 1994, Van Buren 1995). In fact, the
development of human capital obtained through
stakeholder management allows an organization
to contain their costs sustained for:
• substitution of personnel, since the dras-
tic reduction in the turnover rate leads to
improved motivation leading to cost re-
ductions for the training of newly hired
personnel (Hillmer, Hillmer & McRoberts
2004) and recruitment activities (Greening,
Turban 2000);
• company inefficiencies, since the com-
pany can benefit from the development of
personal competencies as a way to reduce
costs related to possible structural short-
ages in the company (Spender 1996);
• knowledge enhancement, since a more
collaborative office environment benefits
from more efficient and effective processes
of reciprocal learning (Mowery, Oxley &
Silverman 1996, Powell, Koput & Smith-
Doerr 1996);
• operative processes, since improved mo-
tivation, results in increased productiv-
ity among employees as well as a wide-
spread reduction in operative costs (King,
Lenox 2000, King, Lenox 2002). For ex-
ample, empirical evidence demonstrated
190
how concessions of days off for illness of
a family member, the possibility to work
from home, the proposal of flexible work-
ing hours and part time positions have a
positive relationships with productivity
(Siegwarth, Meyer, Mukerjee & Sestero
2001).
The development of human capital resulting
from CR initiatives focused on internal stakehold-
ers, in addition to reduction of operational costs,
also favours an increase in productivity thanks to
a more efficient use of resources.
Specifically, the development of human capital
results in:
• increases in long-term efficiency of the
productive processes, thanks in particular
to activities of employee training (Cook,
Seith 1991). Some studies demonstrated
how stakeholder management activities
cantered around training lead to increases
in individual and collective productivity
(Koch, McGrath 1995);
• improvements in each employee’s produc-
tivity, since the company as a whole bene-
fits from increased motivation. To that end
some studies identified employees who
have a high respect for company values as
among the most efficient ways to increase
productivity (Dyer, Reeves 1995, Getzner
1999, Macduffe 1995, Dyer, Singh 1998);
• Growth in the ability to identify and take
advantage of synergies existing among re-
sources (Hitt et al. 2001), in as much as it
is possible to observe how improved mo-
tivation of the human capital allows for
raising the potential for development and
innovation. Such growth is manifested
in: a more efficient sharing of resources
(Christensen, Anthony & Roth 2004); and
improved production and knowledge shar-
ing (Choo, Bontis 2002, Nonaka, Takeuchi
1995, Zander, Kogut 1995).
Managing Corporate Responsibility to Foster Intangibles
CR initiatives, Relational Capital,
and Financial Performance
The implementation of CR initiatives intended
primarily for those outside of the company struc-
ture leads to substantial improvement in the value
of the company’s relationships, and therefore, in
the many resources comprising relational capital.
The assumption of responsibility was proposed
by certain authors as a useful way to improve the
overall opinion external stakeholders has of the
company thus developing the best possible com-
pany reputation (De Man 2005, Fombrun 2005,
Schnietz, Epstein 2005). Therefore, the initiatives
aimed at external stakeholders improve the intan-
gible resources represented by relationships with
clients, suppliers, investors, and farther reaching
networking relationships.
Expressions of the intention to assume cor-
porate responsibilities in an extended dimension
permit a company to benefit from an improved
opinion on the part of customers, particularly when
considering the positive opinion that said custom-
ers have concerning the social and ethical orienta-
tion that characterizes the company (Brown, Dacin
1997). The theory that stakeholder management
represents an opportunity to achieve improvement
in customer relations can be observed in efforts
made by companies to enhance their actions of
assumption of responsibility through publicity
and advertisement campaigns, trying in this way
to maximize the benefits obtained in terms of
customer relations (Stroup, Neubert 1987).
As for relationships with the suppliers, the
activities aimed at reconciling interests of a social
and environmental nature nourish the reciprocal
and collaborative dimension of the relationships,
accentuating the importance that such dimensions
have for a cost-efficient and proficient manage-
ment of the supply chain (Bell, Oppenheimer &
Bastien 2002, Meel, Saat 2000). Some studies have
noted how increased attention to social appeals
favours stability in relationships with suppliers
(Uzzi 1997), allowing companies to obtain benefits
resulting from the possibility to involve suppliers
in the development of new products and services
(Kamath, Liker 1994).
The assumption of responsibility also produces
positive effects on the relationships that company
maintain with investors, in particular it favours
enrichment thanks to an increased transparency that
activities of responsibility induce in management
(Richardson, Welker & Hutchinson 1999). The
development of attention to stakeholders’ need to
be informed, along with the identification of the
company as ethical and responsible, favours a
positive attitude on the part of investors in their as-
sessment of the company and boosts the stability of
relationships. In particular, as previously discussed,
the activities of stakeholder management directed
at investors allow for increases in the capital in-
vested by those who contemplate ethical and social
concerns when choosing investments.
Improvement in relational capital generated
by activities of stakeholder management encom-
passes all the relationships held by persons from
the categories previously discussed, seen together
as a company’s networking relations. Initiatives
aimed at those outside of the company structure,
in particular, allow a company to accelerate the
process of social legitimization (Wokutch, Spencer
1987). Such increased legitimization is cemented
in collaborative relationships with political and
administrative institutions (Handelman, Arnold
1999), with social movements (Davis, McAdam
2000, Maignan, Ralston 2002), and with the
communities in the region in which the company
operates. Collaboration can be attained in through
engaging in philanthropic activities coherent with
company values (Godfrey 2005) and activities
of integration in the local community (Adler,
Kwon 2002, Fukuyama 1995). The development
of legitimization helps to improve the quality of
the relational capital available to a company, and,
through improvements in the opinions of those in
the network, reinforces the company reputation
and reduces the vulnerability of the company to
the media (Shane, Spicer 1983).
191
 Managing Corporate Responsibility to Foster Intangibles
The development of relational capital result-
ing from activities of stakeholder management
allows a company to observe improvements in
productivity. The consequent improvement in the
quality of the relational capital through stakeholder
management also allows for a reduction in costs
sustained for:
• insurance, thanks to the reduction in proba-
bility that economic damages could emerge
as a result of activities of boycotting by
individuals or organizations attentive to
social and environmental themes (Pruitt,
Friedman 1986);
• transactions with suppliers, since improve-
ment in the relationships with suppliers al-
lows for a higher rate of collaboration with
them and therefore, a containment in part
of costs tied to inefficiency in transaction
processes (Dollinger, Golden & Saxton
1997). It is possible for the company to
take advantages of benefits generated by
the gradual transformation of relationships
with suppliers towards partnerships, with
consequential reductions in supervision
costs (Dore 1985).
The activities of stakeholder management that
fuel relational capital also allow for increases in
growth of the company, in particular because of a
higher number of development opportunities result-
ing from the quality of relationships entertained
(Fombrun, Gardberg 2000). Relational capital en-
richment resulting from the attention to appeals of
external stakeholders allows a company to generate
benefits in terms of future growth because of the
widened range of strategic opportunities available to
a company. In that direction, a particularly significant
opportunity lies in being able to develop valuable
processes of co-creation with customers, who have
an opportunity to inform themselves as to what the
consumers desire and expect (Edvinsson, Malone
1997). Given this inside information not available to
its competitors, a company can take the opportunity
192
to be the first to take action (Lieberman, Montgomery
1988). The development of corporate responsibility
initiatives aimed at external stakeholders allows, in
addition, for an improvement in the company reputa-
tion and subsequently all the opportunities stemming
from such an improvement. The development of a
good reputation allows a company to obtain benefits
in terms of premium price (Porter, Van Der Linde
1995); to contain the threat of possible damages to
the reputation deriving from information of a nega-
tive nature (Kytle, John 2005); to attract an increased
number of customers thanks to a differentiation of the
company founded on mechanisms of the reputation
as a responsible company (Brown, Dacin 1997); and
to obtain improvements in terms of market shares
(Srivastava et al. 1997, Vergin, Qorofleh 1998).
The CR Activities, the organizational
Capital, and Financial Performance
The activities of stakeholder management aimed
prevalently at the processes seem to primarily
impact the organizational capital available to a
company, inspiring activities of innovation and
development conducted by the company and
improving the effectiveness and efficiency of the
productive processes.
The development resulting from activities of
stakeholder management allows for enrichment
in company innovation and development due to
the existence of two relationships.
The first relationship comes from the innova-
tion that the introduction of systems of responsible
management produces in the productive processes.
The introduction of a management system founded
on principals of responsibility leads to a necessity to
revise the overall company processes with the aim
of bringing them into coherence with the extended
assumption of responsibility. Such a revision leads
to the establishment of activities of innovation and
development that are then implemented in the partial
revision of the productive processes.
The second relationship is manifested in
increased involvement of external persons who
Managing Corporate Responsibility to Foster Intangibles
are inspired by the stakeholder management
initiatives. This proves that stakeholders can
directly contribute to company innovation and
development. Their involvement affords a com-
pany improved innovative capacity in as much,
as confirmed by some studies, that capacity is
primarily determined by the cognitive network
established with other economic individuals or
organizations rather than with the internal capacity
of the company (Pisano, Teece 1994, Shan, Walzer
& Kogut 1994). The activities of stakeholder
management, acting in an efficient way directly
on the company’s cognitive network, favours
the organizational capital development of the
company, thanks to a higher degree of company
innovativeness (Pittaway et al. 2004).
Upon attainment of improvement in organi-
zational capital obtained by way of stakeholder
management activities aimed at processes, it is
possible to associate progress both in productivity
and company growth.
In terms of productivity, a company engaged
in activities of stakeholder management directed
at processes, thanks to the partial or total revision
of the processes, can benefit from a reduction
in company inefficiencies, and, consequently,
observe a reduction in operational costs.
The most consistent benefits gained in terms of
productivity are in the fine tuning of the processes
and the attainment of improved effectiveness and
efficiency. Along with this, improvements in terms
of both costs of production and use of company
resources are generated by the increased capac-
ity to innovate and develop (Lev 1999, Parisi,
Schiantarelli & Sembenelli 2006).
Company growth is positively associated
with activities of innovation and development. In
particular it is interesting to note the tie existing
between the activities of stakeholder management
and the possibility to develop patented products
and services. Some studies have demonstrated
how statistically a positive relationship exists
between the number of patents a company holds
and its future growth (Bloom, Van Reenen 2002).
Therefore, the development of systems of stake-
holder management aimed at processes allow a
company to benefit from increased growth oppor-
tunities. In particular, the assumption of corporate
responsibilities creates opportunities to create a
line of products and services with heightened
environmental or social characterizations. Inno-
vation activities carried out to those ends allow
companies to gain in the category of responsible
customers and, consequently, to generate new
strategic opportunities.
Consumer choices seem increasingly more
considerate of the ethical and environmental
characteristics of products and services offered by
a company (Mohr, Webb & Harris 2001), attribut-
ing, therefore, an increased strategic relevance to
the market segment of responsible consumers or
those sensitive to environmental concerns (Hart,
Ahuja 1996, Johnson, Greening 1999).
The Model Toolkit
But how does a company draw benefits from the
combined synergies previously discussed? How do
they go about choosing the most efficient CR initia-
tives from among the many possible projects? To
assist management with incorporating the model
in the decision making process, the following
simple, useful toolkit helps to put the theoretical
design previously described into practice.
Considering the widely recognized difficulty
in attributing a monetary value to intangible
resources, it was decided to objectively evaluate
tools designed for that purpose. It was decided
to propose a tool that favours a qualitative and
descriptive analysis of the benefits in terms of
intangible resources connected to each CR initia-
tive, without however making estimates as to the
potential financial benefits.
The following paragraphs describe a useful
protocol for prioritizing CR initiatives within
the outlook of the model, analyzing them as to
the effects produced on the three dimensions of
intangible resources. That protocol is subdivided
193
 Managing Corporate Responsibility to Foster Intangibles
Figure 2. The model toolkit: expected figures
into four steps: (1) the evaluation of the portfolio
of doable initiatives (2) the choice of the initia-
tives to embark on, (3) the determination of a
working plan, (4) the monitoring of the results
of the initiative.
1. The first step towards rendering the model
functional consists of evaluating the possible
impacts that each CR initiative could have on
the company’s intangible resources. All the
initiatives, whether they are characterized by
being subjected to constant modifications in
order to adapt to company goals or by a high
level of creativity (including cause-related
marketing activities) or by being regulated
194
by standards (including the publication of a
sustainability report), must each be objects
of evaluation. In order to proceed to the
definition of such a conclusion, it is sug-
gested to use a practical tool for rendering
this analysis organic (figure 2).
The goal of using this tool is to define the level
of benefits that a CR initiative could generate
throughout the different components of intangible
resources. One must then proceed to an evaluation
of the expected benefits for each of the intangible
resources the tool addresses attributing an opinion
on a scale from 1 to 5 (1=bad, 2=improvable,
3=fair, 4=good, 5=very good). The attribution of
Managing Corporate Responsibility to Foster Intangibles
such an opinion should be assigned with respect
to the benefits expected in terms of intangible
resources that could be produced by the tool.
The expression of such opinions permits
evaluators to differentiate between the differ-
ent sectors of the model presented, which, once
completed with the compilation of opinions
expressed, represent the benefits of the initiative
on the intangible resources in a synthetic way.
The primary goal of the tool is not to reach an
objective quantification of the benefits, as much
as to favour the confrontation between the people
charged with identifying relevant initiatives with
reference to the synergies existing between CR
and intangible resources. The necessity to express
a team opinion favors dialogue held to reinterpret
each member’s duty of CR in the perspective
of the model. Should people make contrasting
opinions, they will be called upon to explain the
reasoning behind their judgments. A discussion
about the synergies existing between the activities
of CR and the development of intangible resources
naturally leads to more specific identification of
a company’s intangible resources and its existing
synergies. The toolkit aids in structuring a discus-
sion centred on the interrelations existing between
the dimensions of corporate responsibility and
intangible resources.
2. Once a profile has been compiled and ap-
proved for each CR initiative from among
those possible to implement, comparing
each of their graphs, it is possible to display
a general perspective of the synergies each
CR initiative would be capable of activat-
ing. The analysis of the various graphics
produced aids in the selection of future
projects to undertake, concentrating invest-
ments in CR where the benefits would be
most consistent. Such a tool helps to identify
the practices that present the best benefits
expected in terms of intangible resources
at the same time as best responding to the
contingent demands of the enterprise. The
authenticity of the evaluations conducted
allows a company to implement the CR
initiatives in line with their own strategies
of development, preferring those that assure
the development of intangible resources
in line with the strategy. If, for example,
management identifies the development of
employee motivation as a priority, it will be
opportune to direct choices towards those
CR initiatives that generate benefits in that
area, even if the overall number of benefits
is inferior to other areas. The choice criteria
for CR initiatives does not reside therefore
in the maximization of the overall general
benefits in terms of intangible resources, as
much as in generating intangible resources
selected in the implementation of the com-
pany strategy. The toolkit was not designed
to help companies impartially identify CR
initiatives that deserve the most attention,
but rather support the implementation of
those strategic choices leading to company
development.
3. Once the initiatives top management be-
lieves most opportune have been identified,
it is necessary to consider each possibility
critically, specifying a working plan for their
implementation. Such a plan should include
the following: the project budget, the project
leader, an implementation timeline and any
possible secondary activities of involvement/
information of the stakeholders that allow
for the maximization of benefits in terms of
intangible resources obtained through the
project. Though the first four categories are
typical of the activities of project manage-
ment, and therefore do not warrant closer
examination, the last category deserves a
short explanation. In order to understand this
category, it is necessary to begin by stating
how often implementation of CR initiatives
are insufficient in order to favour the maxi-
mization of benefits, a scenario easily im-
proved should they have been implemented
195
 Managing Corporate Responsibility to Foster Intangibles
with the involvement of the stakeholders
themselves. In this case, in addition to the
activity of publicity that constitutes the first
level of involvement, other activities can be
identified with the aim to directly involve
stakeholders in the project. The benefits in
terms of intangible resources will grow to
the measure by which forms of stakeholder
participation in the project have been antici-
pated, whether in the decision-making phases
or in those operative or in the evaluation of
the results obtained. The optimal situation
that leads to maximization of the benefits in
terms of intangible resources anticipates the
involvement of the stakeholders at all levels.
In order to understand what this entails, let’s
identify the practices of involvement that
can be realized with reference to company
initiatives of a philanthropic nature. At the
decision-making level, from the perspective
of maximizing the intangible resources, it is
currently standard to distribute and collect
survey forms to employees and local com-
munities as to the definition of initiatives to
support. An effective, widely used practice is
to administer the employees a questionnaire
so as to gather their opinions as to a pack
of initiatives that could potentially gather
donations. With reference to functional in-
volvement, the company can provide sign-up
forms of active support for the initiative to
the workers, who may then, for example,
concede volunteer working hours. In this
way, in addition to allocations in money,
employees become participants in as much as
they may dedicate a portion of their working
hours to time to support the project. Finally
the evaluation can be structured foreseeing
the presentation of a financial statement of
the outcomes obtained in the balance of sus-
tainability, favouring in this way continued
dialogue with stakeholders and putting the
employees in a condition to understand the
produced benefits.
196
4. The last phase of the protocol consists in the
periodic monitoring of the results obtained
so as to understand if the expectations in
terms of improvement of the intangible
resources have been achieved. The process
of evaluation conducted in the first phrase
of the project can be repeated more than
once, periodically, or at the project’s con-
clusion. It would therefore involve holding
discussions about the opinion of the benefits
attained, compiling a profile with respect
to the real benefits generated by the project
on the intangible resources. Superimposing
the two evaluations on a single tool, it will
be possible to proceed to an analysis of the
differences existing between the expected
and actual benefits. An example of such a
result is given in Figure 3.
The analysis of such contrasts encourages a
discussion concerning the strong and weak points
of the project, allowing participants to understand
the reasons behind the decreased or increased
results obtained. Such contrasts, in fact, may be
due to various causes: the conditions previously
established may have been unexpected, there may
have been excessive expectations with respect to
the project, a change in the project conditions dif-
ferent from those foreseen may have developed,
or still other explanations that would have been
impossible to anticipate. This phase is of par-
ticular importance since, operating on a partially
unexplored plane, it becomes indispensable to
start a process of gradual learning and fine-tuning
that, in time, allows a company to significantly
develop the intangible resources it has available.
Continual improvement is an essential element of
the model, since the development of intangible
resources and the sustainability of the model
itself are conditioned to the continual adaptation
of the existing practices. Only a careful process
of evaluation may allow a company to develop
those skills necessary to better respond to the needs
for intangible resources dictated by the strategy
Managing Corporate Responsibility to Foster Intangibles
Figure 3. The model: expected and actual figures
as well as respond to the fluctuating demands of
external stakeholders.
The toolkit is intended to support the de-
velopment of a CR strategy that best serves the
financial performance. The endeavour is to equip
top management with a methodology that allows
them to carefully review choices of CR practices
that present an accentuated capacity of generat-
ing intangible resources. The tool is deliberately
simple and flexible in order not to restrict the
creativity that, necessarily, distinguishes the search
for solutions capable of taking advantage of those
spaces in which the initiatives undertaken are
capable of satisfying the expectations of stake-
holders while contributing to the competitiveness
of the company.
ConClusions
The model presented consists of a new approach to
the development of CR initiatives, which contrasts
the idea that upholds that the attention to stakehold-
ers’non-economic expectations is detrimental to the
shareholders’ interests. On the contrary, CR activi-
ties can be an opportunity for shareholders, being
that the latter can benefit from financial performance
improvements produced by a pragmatic attention
to the stakeholders’ non-economic requests. If at-
tention towards stakeholders’ requirements is part
of a strategy directed at exploiting the relationships
with intangible resources, it is possible that these
activities may generate higher values, both for the
shareholders and the stakeholders, bringing the
197
 Managing Corporate Responsibility to Foster Intangibles
company closer to the implementation of strategies
that are responsible and successful from a competi-
tive perspective. Thus, an adoption of this model
eases the tension existing between stakeholder and
shareholder interests, allowing the assumption of
responsibility to directly contribute to the process
of increasing company value. In this perspective,
CR initiatives are not limited to donations or phil-
anthropic activities, which consist in redistributing
wealth produced amongst stakeholders, but insofar
as they can support the intangible resource develop-
ment, they become essential elements of company
competitiveness.
The model’s central thesis thus consists in
proposing that CR activities management needs
to take place within a new perspective, taking dif-
ferent approaches as to concerns of stakeholders,
approaches which are creative and better able to
exploit the existing links with intangible resources.
In this respect, an attentive management of social
investments becomes strategic, since insufficient
or overstated situations can be damaging for the
company. Overextension of CR activities can
certainly favour the structure’s stability over time,
but it can also remove resources from company
development, requiring higher investments for per-
formance maintenance over time. On the contrary,
insufficient appropriations for those activities can
lead to difficulties in sustaining business perfor-
mance over time, leading to the disappearance of
intangible resource development, which fuels a
company’s financial performance.
Thus, the necessity emerges for an increased
commitment of attention towards CR activities’
impact on intangible resources. Specifically, the
many possibilities offered by the model’s imple-
mentation– done successfully and complete with
all proposed connections – seems to suggest dif-
ferent paths for optimizing the benefits proposed
by that paradigm.
The first path consists in assisting companies
currently developing CR practices in recognizing
the convenience of giving corporate responsibility
strategic relevance. Thus, the suggestion is to oper-
198
ate in the direction of increased awareness amongst
top managers about opportunities offered by the
integration of responsibility in company strategy,
highlighting specifically how an approach, which
intends to derive benefits from such practices, is
not opposed to and does not deny the philanthropic
nature of these operations. The development of the
attention towards company benefits, in fact, does
not reduce the social value of the realized actions,
and furthermore does not diminish participants’
philanthropic interests. Thus, it is a question of
favouring a management culture change towards
the increasingly creative orientation for the imple-
mentation of win-win strategies, able to reconcile
philanthropic and competitive tensions.
A second path consists in developing the
awareness of synergies and instruments to support
creativity. The commitment to benefiting from
the synergies proposed by the model requires
entrepreneurial creativity in looking for innovative
activities sure to benefit from the suggested cause
and effect connections. The use of such creativity
is thus a necessary condition for the optimiza-
tion of the benefits suggested by the proposed
paradigm, but it does not seem to be sufficient to
guarantee achievement. In this respect, it seems
necessary to proceed with the development of a
specific knowledge package regarding efficiency
conditions for every stakeholder management
system area.
These forward-thinking steps seem necessary
to overcome the deceptive conflict between the
tension towards profit and the attention to social
responsibility, thanks to the possibility of CR ac-
tivities contributing directly to the value creation
process of a company. The proposed model thus
suggests how such activities should not be limited
to wealth redistribution amongst stakeholders,
since they can become fundamental elements
in the company’s competitiveness to the extent
that they support the development of intangible
resources.
Managing Corporate Responsibility to Foster Intangibles
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 207

Chapter 12
Intellectual Capital Management
in Long-Lasting Family Firms:
The DuPont Case
Rosa Nelly Trevinyo-Rodríguez
EGADE Campus Monterrey, México

ABsTRACT
How to acknowledge, manage and measure intangible strategic resources embedded in organizational
settings—such as intellectual capital—has been a widely discussed topic during the last two decades.
However, when referring to unique organizational forms such as family-owned or controlled firms, the
topic is understudied. Considering that approximately one third of S&P 500 are family-controlled firms—
i.e. DuPont—, which have survived beyond a lifetime, the author asks herself how these long-lasting
family businesses managed to balance the strategic and parallel creation, development and use of their
intellectual capital both at the family and business levels in order to support growth and regeneration.
She introduces the ICFB-Family Wealth matrix in order to describe our findings.

inTRoDuCTion This chapter discusses how the strategic ad-

Intellectual Capital is one of the key-success factors
a multinational company has to care about in the
new economy. And, although much has been said
about how to value, measure and analyze intangible
assets, not many authors have focused their efforts
in determining how the strategic use of intellectual
resources could leverage not only the firm pro-
ductivity and owners’ reports, but also its people’s
creativity, innovation and well-being.
DOI: 10.4018/978-1-60566-679-2.ch012
ministration of these intangible resources could
become a sustainable competitive advantage over
time, making a company achieve market dominance
and a leading position in the industry. We analyze
the DuPont Case, a family-controlled business,
and examine how the family background provided
a set of qualitative resources that impacted (and
interacted with) other assets in the organization,
creating a unique way of doing and viewing things
(e.g. initiatives, values and conduct policies).
How long-lasting family firms such as DuPont
managed to balance the strategic and parallel cre-

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 Intellectual Capital Management in Long-Lasting Family Firms
ation, development and use of their intellectual
capital both at the family and business levels in
order to support growth and regeneration is our
main question. Three propositions were gener-
ated and summarized in the ICFB-Family Wealth
Matrix we introduce here. We put forward the
idea that family firms tend to move along the
different quadrants, depending on their “family
first” or “business first” focus, intending to find
an equilibrium and stability that could help them
outlive and outperform beyond a lifetime.
intellectual Capital and
its strategic use
The field of intellectual capital (IC), as well as
the tools and models in order to manage, transfer
and develop knowledge, has experienced a break
through during the last twenty eight years—since
Itami’s first publication (1980)--, increasing the
current level of interest in measuring and account-
ing IC. The latter, has been basically due to the
implications IC has on the strategic attainment of
core business objectives, as well as by the role
it plays when referring to valuation of the firm’s
market value.
Measuring and accounting for IC has become
a main objective for researchers and practitioners
due to the heavy flows of information firms receive
from internal and external sources. Environmen-
tal changes, global trends, internationalization
of firms (which push further the compatibility/
comparability of accounting standards), and the
creation of new business models have made IC
a valued resource not only in the knowledge-
information businesses (hi-tech firms), but also
in the brick and mortar ones.
Knowledge is power, and when referring to
intellectual resources, IC means “competitive
advantage”. The reason is simple: it translates
into financial performance and impacts the firm’s
market value. In fact, differences between firms,
including variations in performance, may represent
differences in their ability to create and exploit
208
their internal resources and capabilities (Penrose,
1959; Andrews, 1971), including intangible assets
such as IC. Special capabilities of organizations
for creating and transferring knowledge are being
identified as a central element for organizational
advantage. Indeed, from a perspective of the
value-added, intellectual capital brings value to
the corporation in two ways: strategic position and
financial/economic value (Sullivan, 2000).
According to the resource-based view of the
firm (RBV), a firm’s endowment of resources is
what makes its competitive advantage sustainable
in time, stressing the importance of intangible
resources as a key to sustainability (Wernerfelt,
1984; Rumelt, 1984; Barney, 1996; Itami, 1987).
Going further, the intellectual capital-based view
(ICV) of the firm (K.K. Reed et. al. 2006), be-
ing an elaboration of Leonard-Barton’s (1992)
knowledge-based view, and grounded on RBV,
seeks to explain the hidden knowledge based
dynamics that underlie a firm’s value focusing
on the stocks and flows of knowledge capital
embedded in an organization.
To acknowledge and measure IC and its direct
associations with financial performance (Youndt
et. al., 2004) –based on ICV--, we have to be
clear on its structure/design. In order to do so,
next section analyzes the different forms of IC
and its components when referring to the busi-
ness arena.
Forms of intellectual Capital
A firm’s intellectual capital consists of the unique
collection of intangible resources, and their trans-
formations and interrelationships (Bontis, 1999;
2001; Bueno et. al, 2004). Edvinsson and Malone
(1997) define IC as a two-level construct: human
capital and structural capital. According to them,
human capital is the knowledge created by, and
stored in, a firm’s employees, while structural
capital is defined as the embodiment, empow-
erment and supportive infrastructure of human
capital. They then divide structural capital into
Intellectual Capital Management in Long-Lasting Family Firms
organizational capital and customer capital, being
them defined as:
a) Organizational Capital: Knowledge cre-
ated by, and stored in, a firm’s information
technology systems and processes, that
speeds the flow of knowledge through
organizations.
b) Customer Capital: The relationships that a
firm has with its customers—called by Bontis
(1996) relational capital (and encompassing
all external relationships).
In addition, other management authors such as
Nahapiet and Ghoshal (1998) have also referred
to another component: Internal Social Capital or
the capital associated with internal relationships
i.e. among employees, between employees and
supervisors, etc.
To make it simple, in this text we consider that
IC consists of three basic components: human,
organizational, and social capital--both internal
and external dimensions—(in line with K.K.
Reed et. al., 2006). These three basic components
incorporate all the above-mentioned constructs,
being therefore an integrative umbrella that al-
lows us to manage one general arrangement and
definition. Viewed statically and on their own,
these components do not create value. However,
when combined, they do--they interact with each
other, creating resource synergies--. As a matter
of fact, intellectual capital is created through a
combination and exchange of existing intellectual
resources, which may exist in the form of explicit or
tacit knowledge and knowing capacity (Nahapiet
& Ghoshal, 1998). The latter suggest that IC ex-
ists as a set of interrelationships intertwined in
the organizational system of the enterprise; being
therefore, socially embedded and representing a
capability of a social collectivity. If that’s the case,
IC is primary concerned with social relationships
(Nahapiet & Ghoshal, 1998), being predisposed
by the social context individuals and/or teams
work in, develop, and grow.
From the many different types of existing
businesses, there is one-of-a-kind where social
relationships and context matter the most: Family
firms. This is so, due to the reciprocal relation-
ships between the “family” and the “business”.
Recognizing that the family and the business
systems are intertwined and that the family firm
continuity depends on the reciprocal impact of
family on business and business on family, as
well as on the resources, especially intangible
ones, of both systems is an essential when dealing
with the firm long-term competitive advantage
and survival.
Family Firms and intellectual Capital
Family firms are the most common type of organi-
zation worldwide, representing more than 60% of
the current worldwide enterprises, and generating
from 40 to 60% of the world’s GNP (Trevinyo-
Rodríguez & Bontis, 2007). And, although there
is no unifying paradigm for research and practice
in the field of family business studies (Wortman,
1994), there is agreement on the fact that family
firms are complex, dynamic and rich in intangible
resources (Habbershon & Williams, 1999).
Family firms are enterprises with specific cul-
tures and ways of doing things, being them unique
in nature and behavior. The latter is understood,
because behind every family business is a unique
“family”. Indeed, what distinguishes a family busi-
ness from a non-family business is precisely the
“family”, since it imprints its set of family values,
know-how, social capital, reputation, meaning
and culture to the enterprise. Indeed, many of the
potential advantages–and disadvantages—family
firms are said to possess are found in their family
and business processes/dynamics.
Over the last quarter of a century, the field
of family firms has evolved significantly in
understanding how family enterprises are dif-
ferent from non-family businesses, not only in
composition, capabilities, resources, character,
and perspectives/goals, but also in performance
209
 Intellectual Capital Management in Long-Lasting Family Firms
(included economic costs –monitoring, control,
etc.). Important contributions have been made in
identifying the holistic nature of family and busi-
ness behavior--systems theory (Davis & Stern,
1980; Lansberg, 1983; Davis & Tagiuri,1989), in
pointing out the interrelationships of family and
business as a source of both benefit and disadvan-
tages (Kets de Vries, 1993; Trevinyo-Rodríguez,
2008), in establishing that family firms have
certain competitive advantages related to their
values and tradition (Brokaw, 1992; Aronoff, As-
trachan & Ward; 1996; Habbershon & Williams,
1999; Trevinyo-Rodríguez & Bontis, 2007), as
well as in emphasizing family relationships as a
tool to enhance motivation, loyalty and trust not
only among family members, but also among
employees (Tagiuri & Davis, 1996; Trevinyo-
Rodríguez, 2007).
It’s precisely on this last point that we want
to build on, since when referring to family firms,
family relationships translate into family ties and
values (Trevinyo-Rodríguez & Bontis, 2007).
These family ties and values are important not
only at the family level, but also at the business
organization, since it can reduce transaction costs,
facilitate information flows, knowledge creation,
accumulation (Burt, 2000; Arregle et.al., 2007) and
dissemination, improving creativity, innovation
and people’s well being (Trevinyo-Rodríguez,
2007).
Family ties and values provide a basis for action
for family members and employees—creating a
family culture, which may impact the develop-
ment of intangible resources. In fact, much of the
knowledge of the company is tacitly embedded in
the experiences of workers and/or family members.
These experiences, actions and interactions within
the family cultural patterns and traditions may
act –when positive-- as a source of competitive
advantage since they cannot be imitated.
When a resource is valuable, rare, costly to
imitate and without substitutes, it provides the
basis for a competitive advantage (Barney, 1991),
providing superior performance. Family firms
210
have been shown to over-perform when compared
with non family firms, reporting superior profit
margins, faster growth rates, more stable earnings
and lower dividend rates (McConaughy et. al.,
1995). In addition, a study by Anderson and Reeb
(2003) depicts how even among the S&P 500, firms
that are under the influence of founding families
outperform those that are not—in USA, Business
Week (2003) reports that approximately one third of
the S&P 500 firms have founding family members
active in their management and/or board--.
Thus, when examining the links between the
firm’s internal characteristics (capabilities), pro-
cesses and performance outcomes in order to see
if family businesses have a sustainable competitive
advantage, we conclude that they do –when resourc-
es are managed strategically (in absence of opposite
negative characteristics; i.e. conflict among family
members)--; this competitive advantage is based on
the bundle of the intangible resources they possess
(e.g. IC), as well as in their “family and business”
interactions. In order for family firms to sustain
their competitive advantage over time, they must
be able to administer and measure their intangible
resources competitively, taking into account that
the development and sustainability of social rela-
tionships in the family business must be aligned
with the enhancement of the intangible resources
of the family (as a social nucleus).
Given that IC encompasses all the human,
organizational and social assets of the organiza-
tion, which in turn include individual and team/
organizational competences, attitudes, intellectual
agility, relationships, processes, as well as renewal
and development areas (Roos et. al., 1997), we
establish a division between the intellectual capital
assets of the family business and the resources of
the family (social context). We base our separation
on the fact that when referring to the family firm,
intellectual capital contributes to creating share-
holder’s and stakeholder’s value (market value),
while when referring to the intellectual capital of
the family, it contributes to the development of
the family wealth (collectivity of kin).
Intellectual Capital Management in Long-Lasting Family Firms
iCFB and the Family Wealth
Trevinyo-Rodríguez and Bontis (2007) devel-
oped the ICFB (Intellectual Capital of Family
Businesses) notion, which consists of the sum
of qualitative and quantitative intangible assets
family firms possess. Those intangibles include
the people, processes, culture, traditions, brands,
patents, trademarks, etc. affecting the firm per-
formance and market value.
It’s interesting to say that the ICFB can be
either positive or negative. That means, it can
add or detract value to the family enterprise. It
will add value when the family intangible and
tangible resources –from now on called family
wealth--, are aligned with the firm’s soul, brain
and heart –human capital, structural capital, and
relational capital respectively--. That is, when a
parallel planning process between family wealth
and family business resources is achieved.
The wealth of the family is composed by three
kinds of capital: human, intellectual and finan-
cial. However, the genuine “wealth” of a family
consists basically of the human and intellectual
capital of its family members, while the family
financial capital is a tool to support the growth of
the former resources (Hughes, 2004).
The human capital of a family consists of the
individuals who make up the family. When refer-
ring to individuals (family members) we have to
take into account their physical, mental and emo-
tional well-being. On the other hand, the family
intellectual capital is comprised by the knowledge
gained through the life experiences of each fam-
ily member, or what the family members know
tacitly and explicitly regarding the business, its
relationships, its customers, etc., plus the family
shared values –traditions--, and wisdom transmit-
ted from generation to generation (craftsmanship).
“The strength of a family rests on what it knows”
(Hughes, 2004, p. 17).
Is precisely this kind of corresponding “firm
& family-specific resources” which can either
become a competitive advantage or disadvantage
when dealing with the new economy. If they are
aligned, they can help the company to develop. If
not, they can sow the seed of conflict, disunion,
and failure. When family firms develop exponen-
tially over the years and generations, ownership
structures change and the family-owned busi-
ness becomes a family-controlled business. It’s
precisely at this point in time when dealing with
strategic planning of intangible resources, both in
the family and the business, becomes crucial.
“Renewal and development” (one of the 6
areas composing IC, included in the ICFB), which
Roos et.al. (2007) describe as “the intangible
side of anything and everything that can generate
value in the future… but has not manifested that
impact yet” (p. 51) becomes key. The latter, due
to the business reinvention and survival neces-
sities (growth): major problem in family firms
(Trevinyo-Rodríguez & Bontis, 2007). In addi-
tion, environmental complexities, uncertainty,
globalization trends, and continuous change in
customers’ needs, push family firms to overcome
organizational rigidities that may develop due
to conservativeness, tradition and/or established
processes and values, since these rigidities un-
dermine their ability to function effectively, and
as a consequence, to survive.
Therefore, both external plus organizational
factors and family issues (“family wealth”) must
be administered simultaneously and strategically
to facilitate survival and growth, letting next
generation members innovate and reinvent the
business (intrapreneurship). Entrepreneurial ori-
entation on the part of next generation members
reflects the extent to which the family engages
in business innovation and new ventures. “Char-
acteristics of risk-taking, innovativeness, and
proactiveness, which constitute entrepreneurial
orientation (Miller, 1983) are key to fully imple-
menting intellectual capital in order to create
higher levels of innovation” (Wu et. al., 2008, p.
272). As a matter of fact, reinventing the family
business is not only a next generation member’s
duty, but also, a right.
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 Intellectual Capital Management in Long-Lasting Family Firms
Applying this insight to the ideal strategic
balance between ICFB and Family Wealth, we
can formulate a set of propositions regarding the
strategic focus families and family firms must
have regarding the “business” and the “family”
development, as well as about the consequences
on long-term sustainability of the enterprise and/
or business family.
1. Families that manage their family-business
dynamics with the “business first maxim”,
will focus on developing the ICFB (at the
business level), putting in second term the
family wealth preservation/development
(human, intellectual and financial capital of
family members). The latter, will put the busi-
ness and the family units at stake, since the
strategic competitive advantage the firm may
get in the short-term is not sustainable over
time--the family next generation members
won’t be prepared to run the enterprise.
2. Families that manage their family-business
dynamics with the “family first maxim”, will
focus on developing their Family Wealth
(at the family level), considering the ICFB
sustainability/development as a counterpart.
The latter, will put the business unit in a dif-
ficult position, since its survival will depend
entirely on the family members’ abilities and
relationships.
3. Families that find an ideal balance between
their ICFB-Family Wealth Strategic ad-
ministration, will outlast and outperform
(long-lasting family firms), sustaining their
unique “family-business” resource base over
time. These enterprises will tend to innovate
constantly, reinventing themselves as they
pass on from one generation to the other.
We summarize our arguments in the ICFB-
Family Wealth Matrix below (Figure 1).
A case of a multinational family-company
which has been reinventing itself during the last
206 years—long-lasting firm--, and which has
212
invested a lot in strategically developing its in-
tangible assets, especially, its people’s intellectual
capital--both at the business and family level--,
is DuPont (nowadays located in the positive/high
right-upper corner quadrant of the ICFB-Family
Wealth Matrix). A world leader in science and
technology in a range of disciplines–including
biotechnology, electronics, materials science,
safety and security, and synthetic fibers, it oper-
ates globally and manufactures a diverse range of
products, employing 59,000 people worldwide.
When analyzing its history, we can see how
each generation not only invested in acknowledg-
ing, developing and measuring their employees’
and family members’ human and intellectual capi-
tals, but also successfully preserved its financial
capital by establishing governance mechanisms
that promoted joint decision making over long-
term planning periods.
By forming a social set of shared values and
relationships that each successive generation
reaffirms and readopts, plus adapting it to the
environmental demands, the family increases the
chances of passing to the next generation not only
a family heritage, but also a long-lasting family-
owned or controlled firm. Below, we analyze how
the DuPont family developed different actions over
time –e.g. strategic exploration, organizational
change and development, financial restructuring,
etc.—encouraging the strategic use of ICFB, the
wise preservation and development of the fam-
ily wealth, as well as the family business growth
(performance), reinvention and endurance.
The DuPont Company
Family and Business History1
The DuPont Company, the most important chemi-
cal company in the United States, was founded in
July 19th, 1802; with French capital by Eleuthère
Irénée (E. I.) du Pont (chemist and industrialist).
E.I. du Pont de Nemours & Company, originally
a gunpowder manufacturer on the banks of the
Intellectual Capital Management in Long-Lasting Family Firms
Figure 1. ICFB-Family Wealth Matrix (Source: Trevinyo-Rodriguez, 2008)
Brandywine River, has become nowadays one of
the world’s most innovative firms. “It managed
to do this because a succession of talented sons,
nephews, and grandsons of E. I. du Pont were
able to keep the business going” (Blair, 2003,
p. 449).
After his death in 1834, the company changed
its structure from a controlling owner stage to
a sibling partnership. DuPont siblings, Alfred,
Alexis and Henry took charge of the family firm,
buying the French stockholders (those who fi-
nanced their father) in order to assure full-control
of the enterprise.
In 1889 however, Henry du Pont, “who had
ruled over the gunpowder empire with an iron
fist” (Blair, 2003, p. 449) died, leaving control
to his nephew Eugene du Pont (son of Alexis)
who also believed in tight control of the firm,
sharing little power with the next generation. In
1899, the firm was incorporated in the State of
Delaware; however, the act of incorporation ap-
pears to have been just a technicality, with all the
stock held by those family members who had been
partners (Blair, 2003; Frazier Wall, 1990). Henry
A. du Pont (a cousin of Eugene’s) had pushed
for incorporation as a mechanism to weaken the
control Eugene had as president and sole executive
officer of the partnership. And, although Henry
A. never led DuPont, he was an important figure
within the family company as a senior partner.
In fact, his idea of reorganizing the partnership
as a corporation in 1899 was intent to distribute
control rights (Blair, 2003; Frazier Wall, 1990).
According to the Delaware law at the time, the
213
 Intellectual Capital Management in Long-Lasting Family Firms
newly formed corporation would need a set of
officers. Nonetheless, Eugene du Pont set as his
main prerequisite for the incorporation the fact
that he would still be president. There’s no need
to say that he continued unwilling to delegate
authority.
When Eugene died in 1902, three young cous-
ins Pierre, Alfred and Coleman took over control of
the one-century-old family business. The process
they followed was indeed interesting. The fact is
that when Eugene died, the elder members of the
du Pont family feared that none of the next gen-
eration members had the qualifications to run the
company; they feared that they might dissipate the
wealth if they took over the management (Colby,
1984; Blair, 2003). After analyzing it a lot, the
du Pont elder members reached a decision: They
will sell their interests in the firm to their major
competitor (at that time, Laflin & Rand). Yet, dur-
ing a shareholders’ meeting where the sell of the
company should be approved, the three cousins
Pierre, Alfred and Coleman stepped forward to ask
if they could buy the company from their older
relatives (surviving partners). They did, trans-
forming it from an explosives manufacturer into
a science-based chemical company. “The junior
members of the clan bought out the position of the
senior members for notes worth $12 million and
28% of the common stock in the newly reorganized
firm” (Blair, 2003, p.450; Colby; 1984).
Although a widely respected company but also
weighted down by tradition, the young cousins
modernized company management, built research
labs, and marketed new products like paints,
plastics and dyes. Pierre and Coleman possessed
financial expertise and led the family company to
unprecedented success; Coleman was president,
Pierre treasurer, and Alfred vice-president of E.I.
du Pont de Nemours & Company. The company
was reincorporated in 1903 in New Jersey (whose
corporate law by then permitted corporations to
own the stock of other corporations), consolidating
all the various firms of the DuPont Company into
a single firm. In addition, Pierre, Alfred and Cole-
214
man reorganized the company: they established an
executive committee and a fifteen member board
of directors (consisting of the three cousins plus
four other members of the executive committee,
three members of the elder generation and five
directors who were minority shareholders).
In 1915, a group headed by Pierre, which
included outsiders, bought Coleman’s stock.
Alfred was offended and sued Pierre for breach
of trust. The case was settled in Pierre’s favor
but his relationship with Alfred suffered greatly
and they did not speak after that. Pierre served as
DuPont president until 1919, giving the company
a modern management structure, modern account-
ing policies and made the concept of return on
investment primary.
During World War I, the company grew a lot
due to advance payments on Allied munitions
contracts. The Du Pont’s made over $250 mil-
lion in profits from World War I (Colby, 1984).
As chief supplier to the Allies, DuPont shipped
an astonishing 1.5 billion pounds of explosives.
By the war years, there was an active market
for DuPont shares, and the stock soared to $775
from $182 (Lowenstein, 1999). Du Pont supplied
the Allies with about 40% of needed explosives
which transformed the company into a giant in
just 4 years.
It was during this time that members of the du
Pont family created a holding company named
Christiana Securities (Christiana) as a means of
liquidating some of their substantial holdings in
E.I du Pont de Nemours & Company without
diminishing their control of the corporation. They
wanted to preserve family control of the company.
The three brothers, Pierre, Irénée and Lammot,
owned more than two-thirds of Christiana. Pierre
was President; Irénée was treasurer and Lammot
vice-president. Nephew Belin du Pont was sec-
retary and there were but three other directors:
A. Felix du Pont, R. R. M. Carpenter and John
J. Raskob.
Named after a tributary in Delaware, Christiana
Securities held 3,049,000 shares of DuPont com-
Intellectual Capital Management in Long-Lasting Family Firms
mon stock, constituting 27.56% of the 11,000,000
odd shares outstanding. On July 1st, 1935, the
Christiana holdings had a value on the New
York Stock Exchange of $307,949,000 (Winkler,
1948). Christiana Securities, the family holding
company for DuPont, was later (under antitrust
pressure from the Justice Department,) merged
into DuPont during 1977.
Today, it is certain that fewer than twenty
individuals, most of them du Pont’s and in-laws,
own more DuPont stock than do all of its 51,865
stockholders.
Reinvention, Growth and Endurance
DuPont, since its beginnings has been a science
company and science plays a prominent role
for the company’s business growth. There are
over 5,000 scientists and engineers working for
DuPont’s 75 research and development facilities
across the world (over 40 in the US and more
than 35 located in 11 other nations). As a mat-
ter of fact, DuPont is the home of one of the
world’s first and largest industrial research and
development facilities: the Experimental Station
(Wilmington, Delaware)—which celebrated its
100th anniversary in 2003.
The Experimental Station research and de-
velopment facility has been the home to some of
the world’s most important scientific discoveries
developed by DuPont since 1903, including: Neo-
prene - the world’s first synthetic rubber; Tyvek®
nonwovens; Kevlar® fiber; Mylar® polyester
film; Corian® solid surfaces; Butacite® polyvinyl
butyral; Suva® refrigerants; and Nomex® fiber.
DuPont R&D covers both basic and long range
research aiming at creating new business and new
products, as well as mid and short range research
aiming at improving existing products and invent-
ing new products. Electronics, biotechnology,
safety and security, as well as material science are
the company’s future growth drivers. Research
and development now under way includes nano-
technology, emerging displays technologies, fuel
cells energy sources and biomaterials produced
from renewable resources such as corn.
In addition, being a company interested in
having the best possible research staff–which
translates into a competitive advantage for the
enterprise--, DuPont not only invests in training
its employees, but also offer a huge variety of
internships for PhD and/or MBA students with
high potential. Actually, to translate more of its
ideas into value – both on Wall Street and on the
bottom line – DuPont is marketing its knowledge
base by establishing a five-year, $35 million
research and development alliance with the Mas-
sachusetts Institute of Technology (MIT). The
partnership will help the company lay out a path
to long-term materials and biotechnology goals.
Relationships such as these are expected to grow
in number and scope and will be strategic to future
growth for DuPont.
DisCussion
As could be seen, intellectual capital management
is important in all kind of businesses, but crucial
when referring to family firms. Family-owned or
controlled businesses are unique due to their family
background, and strategically administering both
the business and the family is vital when coping
with continued existence.
The case of DuPont, a long-lasting family
firm, shows how the growth of the ICFB must be
aligned with the development of the family human,
intellectual and financial capital. The best form
to do this is a challenge, since each family has its
own way of dealing with it. However, in order to
support intrapreneurship (renewal and reinvention
–important part of IC) and continued growth in the
family business, the family must strive to:
1) Promote emotional, physical and mental
well-being among its members –let them
choose their individual career and personal
goals (pursuit of individual happiness).
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 Intellectual Capital Management in Long-Lasting Family Firms
2) Clarify the next generation members’ roles
within the family and the business, estab-
lishing rules in order to participate in the
governance mechanisms of the firm (and/
or of the family –e.g. family council).
3) Encourage the knowledge-sharing of fam-
ily values, traditions, behaviors from one
generation to the other, since this provides
a cultural wisdom that will guide the family
business strategic exploration, development
and adaptation.
Additionally, family members must also
increase their intellectual capital baggage by
transmitting from one generation to the other
the “family & business” acumen they have, es-
tablishing governance mechanisms that promote
cooperation, joint-decision making and cohesion
among family members. Training of next genera-
tion members (promoting entrepreneurial spirit
over time–innovation--), as well as the clarification
of their roles within the family and the business
units will help family members to acknowledge
their human and intellectual capital.
Family wealth preservation is a dynamic pro-
cess. A family whose wealth—human, intellectual
and financial capitals—is simply maintaining
value, but not increasing it is in danger of enter-
ing a state of decay, entropy, or to call it in simple
terms: organizational inertia. Next generation
members must be trained and prepared to inno-
vate (family wealth bet). In this sense, investing
in their exposure to other cultures and languages
and in their education may help them get ideas
that could be applied in the business to overcome
competition. Investments in the family wealth
should be translated in advances in the ICFB. If
the latter is not achieved, then the “family first”
maxim may put in danger the sustainability of
the business.
The DuPont Company passed through the
proposed stages (matrix) when dealing with
ICFB-Family Wealth strategic management:
216
“family first”, “business first” and “balance”.
More specifically:
1. Family First – Origin until 1889: E. I. du
Pont was a French immigrant who started the
chemical company in order to get the means
to survive in the US, two years after he and
his family left France to escape the French
Revolution. Like his father, he was initially
a supporter of the French Revolution. After
his father narrowly escaped the guillotine
and the family house was sacked by a mob
in 1797 during the events of 18 Fructidor,
the entire family left for the United States in
1799. They hoped to create a model commu-
nity of French émigrés. Starting the DuPont
Company was their first attempt: It would not
only help the entire DuPont family to make a
living, but also would provide other French
émigrés (original non-family stockholders)
the commercial opportunities they needed
to succeed in the new country.
It’s important to note the fact that in 1834 the Du-
Pont siblings bought back the French stockholders
who financed their father—assuring full control
of the enterprise. The latter may be evidence of
the “family first maxim”, since the eight siblings
of E.I. du Pont—Victorine Elizabeth du Pont,
Lucille du Pont, Evelina Gabrielle du Pont, Alfred
V. du Pont, Eleuthera du Pont, Sophie Madeleine
du Pont, Henry du Pont and Alexis Irénée du
Pont—might have wanted to “feed their family”
based on the earnings they got from the family
enterprise.
2. Business First – 1889-1902: Incorporation
and expansion. The incorporation of
the DuPont Company meant the begin-
ning of a corporation; in other words:
Professionalization of the family firm. It’s
precisely at this stage where the “business
Intellectual Capital Management in Long-Lasting Family Firms
first maxim” seems to be valid. Although,
it has to be said, professionalization did not
occur right away after the incorporation. The
main problem was that it had been a forced
process, not a “family” and “business” agree-
ment. Strategic parallel planning was not
accomplished, causing power struggles at the
family level. Nonetheless, expansion of the
company was achieved: DuPont moved into
the production of dynamite and smokeless
powder.
3. Balance – From 1902-Nowadays. When
Pierre, Alfred and Coleman took control
of the 100-year old company, they trans-
formed the business from an explosives
manufacturer into a science-based chemi-
cal company. They had clear ideas of their
family background—E.I. du Pont was a
chemist—plus their own initiatives (adapted
future vision).
At this point, governance mechanisms where
family and non family members participated
were established—e.g. Board of Directors--, the
modernization of the company was achieved,
financial restructuring and consolidation of the
various firms the DuPont Company owned was
accomplished, and strategic exploration of new
products and services carried out. Research labs
were undertaken as major projects and innovation
was promoted. A balance between the “family”
and the “business” was evident.
As could be expected, this “balance” was just
temporal. In family firms, dynamic relationships
and emotionality is a must. Conflicts arise from
time to time breaking the hard-to-find “family
& business” balance—ICFB & Family Wealth
strategic balance--, however, after a while, calm
returns and stability brings over again a sense of
equilibrium.
Today, DuPont invests more than $1 billion a
year on research and development (R&D) in mul-
tiple disciplines and is home to one of the world’s
largest industrial R&D facilities (Experimental
Station). The result of such sustained R&D efforts
is discontinuous innovation, the sudden appear-
ance of a major breakthrough in technology that
can yield entirely new products, processes, or
services. As the Chief Science and Technology
Officer—Tom Connelly states:
“When the Experimental Station opened 100
years ago, our focus was to turn from explosives
to become a global chemicals and materials com-
pany…Today, as part of our next transformation,
we are putting our science to work by making real
differences in everyday life. Our ability to change
in response to the changing external environment
has established DuPont as one of the world’s
most innovative companies. The Experimental
Station and all of its people over the years have
truly provided advances that have helped make
the world a safer and better place”.
Therefore, broadly speaking, our interpreta-
tions of the DuPont case study seem to confirm
our propositions. The 2x2 matrix summarizes our
conclusions regarding the firm analyzed, its ways
of dealing with strategic management of its intel-
lectual capital at the family and business levels,
and how that impacted in their preservation of
family wealth and ICFB.
ConClusion
When analyzing the DuPont family history we
see how family members’ continuous training,
knowledge, and ability to overcome competition
by expanding their horizons and probing new
strategic orientations based on innovation–one of
the shared-family values—helped them to build
up and keep going a long-lasting enterprise (206
year-old company).
How did this company make its vision of
growth and regeneration happen? One possible
answer is by supporting entrepreneurial activity
across generations. In order to do so, they had to
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 Intellectual Capital Management in Long-Lasting Family Firms
invest in both the family and the business intangible
assets, specifically in intellectual capital. Finding
an ideal balance between the Family Wealth and
the ICFB is relevant when dealing with sustain-
able competitive advantages. It’s in particular
this continuous practice –finding the “family &
business” balance-- across generations which is
the brick and mortar with which families build
organizations that will last beyond a lifetime.
In the age of intellect, DuPont has proved
itself that reinvention of its business based on its
people’s acquisition, accumulation-development,
and transformation of knowledge pays off. In
addition, it also highlighted that commitment
to its family heritage and management not only
influences up to now its core values and strate-
gic actions, but also its own perspective of the
future. This Enlightened Organization invests in
creating value through people, challenging them
intellectually and supporting disruptive and adap-
tive learning.
In order to help practitioners, we introduce the
ICFB-Family Wealth matrix, describing “family
& business” relationships and dynamics that af-
fect intellectual capital creation, development and
sustainability over time at the business and family
levels. The latter, has important implications when
referring to the firm’s growth and survival—e.g.
personnel and human resource management--,
as well as in the family unit dynamics—i.e. next
generation members’ training. Our ICFB-Family
Wealth Matrix describes several configurations
family firms tend to pass through as they grow.
None of the quadrants is better or worse, but the
core idea is that in order for a family business to
become a long-lasting enterprise, the family and
the business need to move strategically from one
quadrant to another, until they find a stable state
(balance) between the intellectual resources gener-
ated, sustained and enhanced in the business, and
the ones nurtured within the family.
218
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 221

Chapter 13
Knowledge Management
and the Links to Human
Capital Management:
Leadership, Management
Capabilities and Sustainability
Marianne Gloet
Abu Dhabi Women’s College, UAE

ABsTRACT
This paper explores various linkages between knowledge management (KM) and human capital manage-
ment (HCM) in the context of developing leadership and management capabilities to support sustain-
ability. Based on the prevailing literature, a framework linking human resource management (HRM),
KM and HCM is applied to the development of leadership and management capabilities to support
sustainability. The framework identifies ways to promote sustainability through creating effective links
between KM and HCM by which organizations can develop their leadership and management capabili-
ties to support sustainability across business, environmental and social justice contexts. This approach
provides managers with a framework for addressing sustainability issues and for developing individual
and organizational capabilities to support sustainability through KM and HCM practices.

inTRoDuCTion level, sustainability is driven by a strong belief that

The significance and impact of sustainability is
growing rapidly in the age of globalization. With
an increased emphasis on sustainable develop-
ment, discourses on sustainability now cross many
boundaries. The context of sustainability today is
both trans-disciplinary and trans-organizational.
Operating at the economic, social and environmental
DOI: 10.4018/978-1-60566-679-2.ch013
socially responsible development is the way of the
future. For instance, scholars like Avery (2005),
Elkington (2004) and Parkin (2000) advocate that
individuals and organizations worldwide should
be engaged actively in protecting the environment.
This worldview adheres to sustainable develop-
ment concepts. A range of factors must be taken
into consideration if sustainability issues are to be
dealt with in an effective manner. In this setting,
organizations, institutions, agencies, industry sec-

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 Knowledge Management and the Links to Human Capital Management
tors, national boundaries and regulatory agencies
are interdependent players in creating a sustain-
able future.
Sustainable development in a knowledge
economy requires consideration of the optimum
way to make knowledgeable interpretations and
recommendations to support sustainability, which
meets the needs of a diverse range of stakeholders.
Certainly, strong commitment is required from
these stakeholders if sustainable development,
not only from an economic standpoint, but also
from a social and environmental perspective is
to be supported in an enlightened manner within
organizations and governments. Part of this pro-
cess includes managing risk in new and uncertain
environments. Moreover, committing to practices
that promote and achieve sustainable outcomes,
particularly in a global context has the supply
of sound knowledge for decision-making as a
prerequisite. Effective knowledge management
(KM) approaches to support the crucial processes
of knowledge creation, sharing and dissemination
are also obligatory. KM is a rigorous process com-
pared to knowledge sharing because it denotes a
specific structure and
strategy, which accompanies the dissemination
of knowledge to produce value-added activities
for an organization. In contrast, without an accom-
panying structure and strategy, it is unlikely that
knowledge sharing per se will produce value-add-
ed outcomes. Without the oversight of KM, both
knowledge sharing and knowledge dissemination
run the risk of becoming ad hoc activities.
KM includes not only recognizing the funda-
mental role of knowledge and information in the
process but also recognizing implicit imperfec-
tions in knowledge and information processes
(Laszlo & Laszlo, 2002; Sage, 1998). Knowledge
for sustainability highlights the need for new
knowledge, for new ways of managing knowledge
and for new work practices to support this process
(Gloet, 2006). Today, the ways in which sustain-
ability knowledge can be effectively captured,
managed, shared and disseminated to achieve
222
effective decision making in a sustainability
context is not well understood (Malone & Yohe,
2002). Nevertheless, developing management and
leadership capabilities to support a commitment to
sustainable development will assist in improving
the present situation. Sustainable development
globally requires significant change, an increasing
awareness of social and shareholder contexts, and
developing a sense of social responsibility, both at
the individual, corporate and government levels.
Sustainable development also demands major
changes in work practices where these practices
drive the vision and approaches to management
in contemporary organizations. Successful sus-
tainable development supports economic, social
and environmental needs simultaneously with
the benefits derived from meeting such needs in
a sustainable fashion. Here, trade-offs and syner-
gies are involved in meeting competing needs and
achieving desired benefits. This is the new frontier
where organizations can demonstrate leadership
and model desired strategies and behaviours as-
sociated with a strong and enduring sustainability
platform. Appropriate sustainability knowledge
and information emerges as a key aspect of effec-
tive decision making in this regard, particularly
when multiple perspectives and stakeholders
are involved. Thus, a strong imperative exists
to develop strategic leadership and management
capabilities within today’s organizations to meet
the challenges of working effectively to promote
the economic, social and environmental forms of
sustainable development. This is a realm where the
nexus between KM and human capital manage-
ment (HCM) may prove to be effective.
KnoWlEDGE MAnAGEMEnT
AnD THE linKs To HuMAn
CAPiTAl MAnAGEMEnT
Considerable interest in KM endures when
competitive advantage is perceived to be linked
directly to knowledge. Within the interdisciplin-
Knowledge Management and the Links to Human Capital Management
ary nature of KM, this interest covers functional
and professional boundaries that range from IT
professionals, to those involved in accounting,
marketing, organizational development and
change management. One feature common to the
widely divergent activities of any organization
is the emphasis on knowledge work, knowledge
workers and the nature of knowledge. While this
debate results in professional turf wars, it has the
potential for identifying new opportunities for
collaboration across professional and functional
boundaries. One area ripe for collaboration is
the emerging group of professionals who have
as their number one priority a focus on manag-
ing knowledge resources in their organizations.
This job is often independent of their levels of
formal training or their designated title within
the organization. KM work also cuts across the
established and functionally embedded group
of HRM professionals. Indeed, the relationship
between KM and HRM has developed in recent
years to the extent that both KM and HRM have
grown to become more sophisticated and complex
(Gloet, 2006). In this light, HCM emerges at the
frontier of conventional HRM practice. There-
fore, the linkage between KM and HCM offers
managers significant potential to share common
understandings of the strategic value of knowledge
in organizations.
The processes of acquiring, developing, de-
ploying and retaining the collective knowledge,
skills and abilities (KSAs) of an organization’s em-
ployees by implementing processes and systems
that match employee talent to the organization’s
overall business goals become the characterizing
feature of HCM. Human capital, as a measure of
the economic value of an employee’s skill set or
KSAs, recognises the value inherent in the educa-
tional attainments, the range of experience, levels
of skills and abilities of employees. Arguably, the
HCM operational platform is broader and more
strategic than conventional HRM. This is particu-
larly the case because those engaged in HCM are
cognizant of the strategic value of organizational
knowledge, especially that knowledge which
resides within the employees of an organization.
Worldwide, HRM in many organizations lacks
a strategic thrust and operates without a strong
underlying focus on knowledge. This mindset oc-
curs when HRM is viewed as being synonymous
with managing employment law or when the HRM
strategy tied to the overall business strategy is
weak or non-existent. In other circumstances, the
potential to move beyond conventional HRM is
reduced because the economic value of knowledge
in general and employees’ KSAs in particular are
marginalized. While HCM is an emerging area
of influence, traditional functional approaches
to HRM retain their dominance in most organi-
zational contexts (Gloet 2006).
A reasonable consensus on the nature and scope
of HRM stands in contrast to understandings about
the nature of KM. Much of the literature of KM
continues to be flavoured with a techno-centric
focus, which posits knowledge as an entity that
can be captured, manipulated and leveraged.
However, perceptions of this type are limited and
ultimately hazardous. Any critical understanding
of knowledge per se and its incorporation into the
management of organizations requires an acute
awareness of the diversity of views about what
knowledge is and what it can do for an organiza-
tion. The range of views on the concept include
perceptions of knowledge as an entity (akin to
information), as a resource, as a capacity and as
a process. In the context of HCM, knowledge is
interpreted as a social creation that emerges at the
interface between people and information. Espe-
cially relevant here are the communities engaged in
communication, knowledge-creation, knowledge
sharing and learning. Operationally, KM encom-
passes all the systematic processes used by an
organization to identify, create, capture, acquire,
share and leverage knowledge (Rumizen, 2000).
For example, although knowledge as such may
be difficult to manage, the related technologies,
systems, instruments, stocks, flows and people
engaged in the process are susceptible to manage-
223
 Knowledge Management and the Links to Human Capital Management
ment structures. Both people and activities can
be controlled and held accountable for particular
outcomes concerning KM. However, given that
such activities today largely concern intangibles,
we are well beyond Daniel Bell’s (1973) venture
in social forecasting. The implications for or-
ganizational structures, resources, cultures and
strategies, management styles and the roles and
expertise of staff become even more complex
when notions of sustainability infiltrate the re-
lationships between these elements. Complexity
increases with thinking about sustainability within
organizations in particular.
Within the traditional function of HRM, the
rise of the knowledge economy has prompted
managers to rethink the profession. The notion
of HRM as purely a bureaucratic personnel
management operation has waned over the de-
cades. This decline has been accompanied by a
fresh conceptualization of HRM to integrate its
activities to support the overall business strategy
with a view to achieving competitive advantage.
Nevertheless, even today, experts caution that
HRM faces extinction if it fails to respond to
the new environment of a knowledge economy
(Lengnick-Hall & Lengnick-Hall, 2003; Saint-
Onge & Armstrong, 2004; Stewart, 1997; Ulrich,
1997, 1999). If HRM is unable to add value under
the new economic conditions, it will come under
extreme pressure (Stewart, 1997; Stone, 2002).
According to Chatzkel (2002) and Gloet (2004,
2006), HRM can overcome the odds and evolve
through contributing to creating effective linkages
between HCM and KM within organizations. In
order to shift the focus of HRM to a broader HCM
perspective, an increased emphasis on the role and
value of KM in organizations is required.
The intangible aspects of knowledge are fast
becoming one of the defining characteristics of
economic activity today. Standing in contrast to
tangibles like goods and the productive processes,
there is a proliferation of information and com-
munication technologies, coupled with greater
organizational complexity, the growth of virtual
224
and global organizations and rapid change. A
rapidly changing environment that features the
growth of knowledge and technology highlights
the need for new sources of competitive advantage
(Lengnick-Hall & Lengnick-Hall, 2003). In turn,
this search suggests that drastic changes within
HRM are also required if HR professionals are to
respond positively to the changing demands of a
knowledge economy.
Traditional HRM can be characterized as
operating within narrow boundaries. In a knowl-
edge economy, the role of HRM must expand,
looking both within and outside the organization
for its raison d’être. Part of this evolution is a
move beyond the traditional focus on managing
people to managing organizational capabilities,
relationships, learning and knowledge (Coates,
2001; Saint-Onge, 2001; Lengnick-Hall &
Lengnick-Hall, 2003; Ulrich, 1997). The emphasis
on discrete HRM practices has also broadened to
include a focus on developing themes and creating
environments conducive to learning. In addition,
HR professionals have recently embraced the
processes of acquiring, sharing and disseminating
knowledge within organizations. In particular,
a focus on learning can facilitate a transition
from a traditional HRM focus to a broader HCM
perspective.
According to Gloet (2006), a revitalization
of the HRM function is necessary to respond
adequately to the new demands of the knowledge
economy by developing linkages with KM requires
fundamental changes within four key areas: Roles,
Responsibilities, Strategic Focus and Learning
Focus. A mapping of the relationship between
these areas is set out in Figure 1.
Roles
Lengnick-Hall and Lengnick-Hall (2003) adopt a
view that in a knowledge economy, organizations
will need HRM that is characterized by a new set
of roles that can assist in generating and sustain-
ing organizational capabilities. Such HRM roles
Knowledge Management and the Links to Human Capital Management
Figure 1. Mapping the Relationship between KM and HRM
include those of the human capital steward, the
knowledge facilitator, the relationship builder and
the rapid deployment specialist. HR specialists in
the first role recognise the value of intellectual
capital and supply the resource to ensure that it
will grow in value. This involves brokering the
services of an organization’s knowledge workers.
The knowledge facilitator places an emphasis
on learning and development, effective KM and
creating environments conducive to knowledge
creation, sharing and dissemination. Relationship
builders focus on creating and sustaining networks
and communities of practice. These relationship
builders join people in various parts of the supply
chain in new and creative ways. The rapid deploy-
ment specialist meets the challenge of operating
in rapidly changing markets where information,
business processes and organizational design may
be combined to meet the dynamic business envi-
ronments characteristic of organizational life in a
knowledge economy. In this environment, KM has
the capacity to broaden and enrich significantly
the role of the HRM professional.
Relationships
HRM in a knowledge economy ideally entails
responsibility for developing and sustaining or-
ganizational capabilities through activities that
cut across traditional business functions. In this
setting, strategy formulation and implementation,
finance and marketing as well as new functions
such as KM fall within the scope of the HR profes-
sional. Given that KM is increasingly thought of as
a means of competitive advantage, it should, there-
fore, be viewed in the same way as other recognized
business functions because it contributes to an
organization’s bottom line. According to a range
of scholars, this requires developing new relation-
ships that reflect a shared responsibility among
225
 Knowledge Management and the Links to Human Capital Management
managers, employees, customers and suppliers
for HRM (Lengnick-Hall and Lengnick-Hall,
2003; Saint-Onge, 2001; Soliman and Spooner,
2000; Ulrich and Smallwood, 2003; Yahya and
Goh, 2002). KM has the capacity to bring forth a
new role for HRM, which provides the basis for
forging new organizational relationships.
strategic Focus
In a knowledge economy, a strategic focus is
imperative to developing human capital and KM.
As MacDonald (2003) suggests, HR professionals
should identify and channel intellectual capital
toward the development of a concise set of or-
ganizational core competencies, strengths and
capabilities. An emphasis on traditional long-term
strategic development and long-range planning
in HRM needs to be complemented by short-
term strategic approaches employed to counter
the often unpredictable, dynamic, fluid environ-
ments, which characterize the contemporary
business world. However, in combination with
a short-term strategic focus, HR professionals
must also think about long-term sustainability as
well as constant renewal and revitalization. As
Lengnick-Hall and Lengnick-Hall (2003) suggest,
a rapid deployment specialist has the capacity to
respond quickly to the needs of business - teams
that can be rapidly assembled, deployed, and
subsequently reconfigured to suit the changing
needs of business environments characteristic
of a knowledge economy are a major source of
competitive advantage.
In order to gain additional sources of competi-
tive advantage from KM and HCM, the identifica-
tion of both core competencies and the integrated
the knowledge sets that distinguish organizations
from one another is an essential goal because
this identification adds value for the clients and
customers of an organization (Bohlander, Snell
and Sherman, 2001). According to Ulrich (1997,
1999) knowledge sets are organizational capabili-
ties. Ulrich further suggests that HRM’s important
226
role is related to creating and developing organi-
zational capabilities, especially those required to
compete successfully in a knowledge economy.
Saint-Onge (2001) too reinforces the need for the
HR function of an organization to be transformed
in order to respond to changing requirements of the
knowledge era. For Saint-Onge (2001), a strategic
capabilities approach is the road forward where
resources are structured across individual capabili-
ties, organizational capabilities and the knowledge
architecture. With this focus, the role of the HR
professional focuses on integrating individuals,
teams and organizational learning for the benefit
of all stakeholders. With changes of this type,
HRM is in a position to play a determining role
in creating and developing those organizational
capabilities, which form part of contemporary KM
strategies geared to creating wealth from intellec-
tual capital while maintaining a commitment to
sustainability imperatives. This also represents a
shift from traditional HR practices to approaches
more in line with HCM strategies.
learning
A knowledge economy implies the need for learn-
ing. Today, the emphasis on creating distinctive
HRM practices includes developing themes and
creating environments conducive to learning and
the acquisition, sharing and dissemination of knowl-
edge within organizations. Creating and sustaining
learning environments and nurturing communities
of practice are part of this new world for the HR
professional. Managing intellectual capital and
developing human capital within the organization
creates a strong emphasis on constant renewal or
revitalization of the organization. Scholars like
Chatzkel (2002) posit human capital as an active
organizational asset. In referring to the four human
capital domains of acquiring, maintaining, devel-
oping and retaining, Jac Fitz-enz (2000) views the
developmental aspect as unique in the sense that
only people can be developed. Thus, the domain
of deveflopment holds the key to achieving orga-
Knowledge Management and the Links to Human Capital Management
nizational change, growing individual and team
capabilities and creating value while simultaneously
attending to sustainability imperatives.
In a setting that places the collective knowledge
of employees as a source of competitive advan-
tage, the HRM function is pivotal in realizing the
potential of KM programs aimed at capturing, us-
ing and re-using employees’ knowledge (Soliman
& Spooner, 2000). Moreover, HRM has a direct
role in enabling employees to develop and build
high quality, creative problem solving skills in a
leadership context (Yahya & Goh, 2002). HRM
contribution to developing expertise in how to
manage learning, re-using knowledge through les-
sons learned and surfacing knowledge, know-how
and best practice behaviours can be significant
(Martin, 2000). For example, Lengnick-Hall and
Lengnick-Hall (2003) view HRM as central to
developing and sustaining a learning focus through
facilitating continuous learning, identifying
sources of employee knowledge, understanding
the mediators that facilitate knowledge sharing
and more importantly ensuring that knowledge of
this type is made available to employees. Through
such a learning focus, a broader HCM platform
can be developed and supported.
DEVEloPinG lEADERsHiP AnD
MAnAGEMEnT CAPABiliTiEs
To suPPoRT susTAinABiliTY
Information and communications technologies
and various organizational forms may not neces-
sarily deliver success in KM within knowledge
intensive organizations. Research, for example,
suggests that cognitive models of KM based on
the capturing, sharing and leveraging pattern will
be less effective than those community based
models, which display clearer understandings of
the characteristics of knowledge work and knowl-
edge workers. Undoubtedly, the future success of
sustainable development lies largely within in the
human realm.
For Doppelt (2003), leadership is the ultimate
key to organizations successfully embracing sus-
tainability. Effective leadership results in effec-
tive dialogue, which is a prerequisite of change.
Leadership commitment to sustainability, for
example, would highlight change and provide
realistic pathways for breaking down those barri-
ers erected to prevent sustainable outcomes. Such
barriers include tunnel vision, past practices, old
ideas and cultural frameworks, which combine
to discourage new visions of the future from be-
ing realized. For Doppelt (2003), these ingrained
ideas reside within an organizational culture and
are mediated via policies and procedures. In this
light, the development and strategic nurturing of
any alternate vision of a future driven by a strong
and committed approach to management and
leadership is paramount.
Broadening Ulrich’s (1997, 1999) notion of
organizational capabilities, developing the lead-
ership and management capabilities necessary
to support sustainability is a crucial endeavor.
Supporting sustainability through the develop-
ment of various leadership and management
capabilities enables organizations to make certain
that ideas concerning ecology, sustainability and
social justice constitute the criteria for managing
and the setting of priorities. This realm is where
partnerships between KM and HCM have the
potential to make a significant contribution to
organizational development (Perez & Ordonez
de Pablos, 2003).
Capabilities that support sustainability include
the capacity to work across a myriad of boundaries
as well as across disciplines. Jackson, Farndale
and Kakabadse (2003) see the need to articulate
a vision that clearly supports sustainability con-
cepts and engenders social responsibility through
clearly identified capabilities. The need to act
as a role model and to convince others of the
positive impact of a commitment to sustainabil-
ity are also essential attributes among leaders.
Simultaneously, effective change managers can
help reduce resistance to notions of sustainability
227
 Knowledge Management and the Links to Human Capital Management
(Barton, Figge & Routledge, 2000; Marshall,
2004; Wood, Bobenrieth & Yoshihara, 2004).
In this context, relationships become anchors to
stabilize the change management process. Other
capabilities supporting sustainability include the
ability to think across boundaries and establish
new relationships, a capacity to work across or-
ganizations, value chains and markets (Marshall,
2004; Rowledge, 2002). Leaders in these change
environments must excel at interpersonal, organi-
zational and inter-organizational communication
and possess the inherent capacity to develop and
maintain broad social and business networks. In
establishing a wide range of relationships, effec-
tive leaders recognize the paramount role of col-
laboration. Other related capabilities include the
ability to be flexible and adaptive when dealing
with people and relationships.
From a strategic perspective, purpose-driven
leadership and the ability to provide strategic
leadership through the development of sustainable
business models is characteristic of both manag-
ers and leaders. Moreover, the need to implement
sustainability strategies and plans across various
organizational levels requires leaders who can
align business goals with sustainability targets and
objectives and produce solid returns on invest-
ment for all stakeholders. Leaders who focus on
renewal and revitalization in not only economic
terms but also in social and environmental terms
are significants assets for the sustainable organiza-
tion (Rowledge, 2002; Wood et al., 2004).
In terms of a learning focus, management
and leadership capabilities include the capacity
to pose reasoned questions, to engage in critical
inquiry and to be cognizant of the values underpin-
ning issues framing debates about sustainability
(McElroy, 2002). In such environments, systems
thinkers with a holistic worldview thrive. Other
capabilities include the ability to recognise that
all systems are fluid and evolving. The ability
to pursue sustainability from an action learning
perspective and the capacity to identify ongoing,
reflective active learning opportunities are also
228
among the most desired capabilities (Marshall,
2004).
Context
The issue of context is paramount in the dynamic
world of KM. Understanding how contextual
factors affect an organization will nurture the
development of appropriate KM approaches
and processes, which will serve to position an
organization in a sound competitive niche while
still maintaining a commitment to sustainability.
KM can effectively serve these purposes if it is
developed and maintained skilfully. As the essence
of knowledge work and the people who perform
it is connected to the acquisition of skills and
expertise, a willingness of people to share these
attributes and collaborate with others is essential
(Newell, Robertson, Scarborough & Swan, 2002).
While organizational capabilities and individual
competencies – human attributes, skills and
knowledge – combine to create the potential for
effective action (Saint-Onge and Wallace, 2003),
effective HCM and KM require a sound under-
standing of the environmental, organizational,
team and individual contexts underpinning any
organization. Knowledge itself is of little value to
an organization unless these contextual aspects are
clearly understood. Much of the tacit and explicit
knowledge remains largely untapped in most or-
ganizations and without a thorough understanding
of context, neither HCM nor KM can brace the
development of the management and leadership
capabilities required to support sustainability.
THE nEXus BETWEEn
susTAinABiliTY, HCM AnD KM
Sustainability remains a novel and elusive concept,
which is hardly surprising in that disposability
is an inherent element in the consumerism that
powered the previous industrial economy. In
today’s knowledge economy, where importance
Knowledge Management and the Links to Human Capital Management
Table 1. Mapping management and leadership capabilities to support sustainability
ROLES
• Ability to work across organizational, national and international
boundaries and disciplines
• Leader as visionary: the vision must support sustainability
• Demonstrate problem solving capacity across a wide range
of complex issues, including environmental, technical, social,
political and economic issues
• Role model – must be able to convince others of the positive
impact of commitment to sustainability, and model behaviour
accordingly
• Change manager – must be able to formulate a vision and ‘sell’ it,
also reduce resistance to notions of sustainability
• Capacity to demonstrate and model self-renewing behaviour
Knowledge creation Knowledge sharing Knowledge dissemination Communication
CONTEXTUAL FACTORS
Processes Enablers Relationships Measurement Feedback Infrastructure
Self-awareness Learning Education Boundary spanning
STRATEGIC FOCUS
• Ability to implement sustainability strategies and plans across
various levels
• Capacity for purpose driven leadership
• Understand need to set benchmarks and measure results
• Understanding the need to provide strategic leadership through
the development of sustainable business models
• Delivers ROI for all stakeholders (as opposed to only shareholders)
• Ability to align business goals with sustainability goals and targets
• Focus on renewal, revitalization in economic, social and environ-
mental terms
is increasingly attributed to the need for sustain-
able resources and institutions, knowledge-based
theory should underpin strategic thinking in
organizations. Within a knowledge-based view,
organizational knowledge is recognized as the
most valuable organizational asset (cf. Curado
& Bontis, 2006; Reinmoeller, 2004). Follow-
ing from a resource-based view of the firm (cf.
Barney, 1991; Halawi et al., 2005; Wernerfelt,
1995), which posits that a firm’s available and
accessible resources are its basis for competitive
advantage, managing knowledge strategically
is a significant source of competitive advantage
(Barnes, 2002). Knowledge is both a key resource
and a basis for sustainability. In this light, knowl-
edge and associated KM practices must too be
sustainable. In the wider search for sustainability,
issues of context, culture and appropriateness are
RELATIONSHIPS
• Ability to think across boundaries, establish new relationships,
work across value chains and across expanded markets
• Demonstrate excellent communication skills
• Capacity to build and maintain networks
• Capacity to broaden relationships, for instance not only across an
organization but also consumers, suppliers, the value chain and the
ecological chain.
• Able to collaborate widely
• Valuing principles of equity, justice, collaboration in all
relationships
• Flexible and adaptive
LEARNING FOCUS
• Identifying ongoing, reflective, active learning opportunities
• Poses questions and engage in critical inquiry
• Values-aware
• Ability to pursue sustainability from an
• Action learning orientation
• Ability to accelerate the learning curve to achieve results faster
• Systems thinker, seeing holistically
• Ability to recognize that all systems are fluid and evolving
of overriding importance. In the realm of context,
there should be a focus on community as well as
on process. With this association, KM enhances
the potential for knowledgeable practices that
are “envisioned, pursued and disseminated, with
other actors encountering these new practices
and learning from them to develop their own lo-
cal knowledge” (Cushman, Venters, Cornford &
Mitev, 2002).
The scope of KM exists largely in the contex-
tual filter that spans the boundaries between the
various interactions between people, organizations
and national cultures. Effective linkages, which
support sustainability, require mutual understand-
ing of the contextual aspects related to the broad
ranges of situations and frameworks in which
sustainability issues are cast. KM involves manag-
ing the context and thereby, the interface between
229
 Knowledge Management and the Links to Human Capital Management
the HRM strategy and situational factors. In the
realm of context, KM offers a range of boundary
spanning activities and support mechanisms for the
HR professional to engage. These include knowl-
edge creation, knowledge sharing, frameworks,
enablers, infrastructure, measurement, feedback,
learning and education.
The application of knowledge and expertise,
through KM and HCM, acts as a platform to
support sustainable development. The deeper the
intensity of knowledge and information exchange,
the better the chances for developing effective
management and leadership capabilities to sup-
port sustainability. While situated and contextual
understandings related to sustainability goals and
practices are required, new modes of KM are also
necessary to facilitate this development because
the drivers of mainstream approaches to manage-
ment development have largely reflected different
visions and objectives. The focus must be on cre-
ativity, internal organizational dynamics and the
social processes of human interaction, especially
given that the latter is central to knowledge creation
and transfer. KM helps to shape organizational
routines that house useful knowledge, which can
be exploited as an organizational rather than an
individual resource (Carlisle, 2000). Knowledge-
based theorists argue that a firm’s unique capabili-
ties in the management of knowledge processes
can be developed into distinctive competencies
based upon exploiting the growing knowledge
generated by these processes (Carlisle, 2000).
The capability for integrating knowledge from
a wide range of disparate sources is an obvious
example in this context. Such organizational
knowledge-based capabilities are culturally bound
and contextually dependent and hence, they are
difficult for competitors to imitate or replicate. It
is in the synergies between these capabilities and
competencies, the learning, cultures and behav-
iours that the richness of the potential relationship
between KM and HRM is most evident.
From the standpoint of HCM, several things
need to happen because traditional HRM ap-
230
proaches still dominate the majority of modern
organizations and even so-called ‘strategic’ HRM
fails to recognize sufficiently the significant
and intrinsic value of knowledge. Therefore,
the transformation from traditional HRM to
knowledge-based HCM approaches is of utmost
importance to organizations wishing to operate
in the modern knowledge environment. The best
way to accelerate this transformation process is
through the development of strong linkages and
partnerships between KM and HCM.
Strong links between KM and HCM support
sustainability through the identification of those
capabilities specific to sustainability and by align-
ing recruitment and selection practices to these
capabilities. Through supportive management
development programs and learning support,
capabilities of this type can be developed further.
This includes identifying key individuals to be
fast-tracked into sustainability roles, normally
based on their personal values and extensive
relationship networks. Sustainability goals can
be built into the HR strategic plan to support the
same goals in the overall business plan (Barton
et al., 2000). Connectivity between sustainability,
KM and HCM is further leveraged through the
inclusion of a strategic provision for human capital
development, both in the context of knowledge-
related capabilities and competencies and the
cultural infrastructure that supports knowledge-
creation and sharing, communication, learning,
and networking necessary for the formation of
communities of practice. Performance manage-
ment and remuneration can also be tied to specific
indicators related to identified capabilities and
desired behaviours.
Finally, the key to maximising the contribution
of KM to a management practice such as HCM is
to promote awareness and understanding concern-
ing the implications of the essential, deep-seated
and often obscure differences in approaches to
KM. This requires an understanding of deeper
underlying values and assumptions, coupled with
an appropriate alignment between overall, strategy
Knowledge Management and the Links to Human Capital Management
(in this case with a sustainability dimension), KM
and HCM.
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234

Chapter 14
Building and Maintaining
Human Capital with Learning
Management Systems
Tom Butler
University College Cork, Ireland

Audrey Grace
University College Cork, Ireland

ABsTRACT
In this chapter, the authors examine how building, integrating and maintaining human capital with
Learning Management Systems acts as an enabler for the management if intellectual capital within
multinational organizations. They draw upon learning theory and training practices to demonstrate that
human capital is best viewed through a competence lens; that is, accounting for human capital should
focus on matters of individual and organizational competence, and that the development of human capi-
tal is, in essence, an exercise in competence development, which involves training and learning. This,
then, is this chapter’s point of departure in understanding how IT-based systems can enable training
and foster learning, thereby building an organization’s human capital.

inTRoDuCTion enterprises include an organization’s physical, hu-

In an intensely competitive, rapidly evolving, and
increasingly knowledge-based high-tech sector,
the ability to learn is critical to the success of
multinational organizations. It is now clear that
building and maintaining a firm’s human capital
through organizational learning represents the only
sustainable source of competitive advantage. Barney
(1991), for example, illustrates that the strategic
resources which underpin the success of business
DOI: 10.4018/978-1-60566-679-2.ch014
man, and organizational capital. Physical capital
includes plant and equipment, geographic location,
and access to raw materials. Human capital includes
the training, experience, judgment, intelligence,
relationships, and insights of managers and work-
ers. Organizational capital includes firm structure
and processes, internal and external relations, both
formal and informal. It is clear, however, that hu-
man capital lies at the foundation of both physical
and organizational capital (Nordhaug, 1994). This
chapter argues that human capital can be enhanced
through the application of IT (as physical capital)

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Building and Maintaining Human Capital with Learning Management Systems
and organizational learning processes (organiza-
tional capital).
Human capital is manifested in the individual
and the collective competences of social actors
in an organization (Nordhaug, 1994). Over the
last number of years, a strategic, human capital-
oriented approach to competence development
through the management of learning has been
adopted by many organizations. This has, in
turn, led to the appearance of a new breed of
Information Systems (IS) known as Learning
Management Systems (LMS) (Dunne & Butler,
2004). Learning Management Systems are now
replacing isolated and fragmented learning solu-
tions with a systematic means of assessing and
raising competency and performance levels across
organizations. Practitioners and IT vendors have
led the promotion and adoption of IT-based learn-
ing management solutions. Accordingly, there is
a dearth of empirical academic research in this
area. Therefore, an important challenge for the
management and information system disciplines
is to better understand LMS, and to examine the
roles and limitations of such systems in building
human capital in order to better inform practice.
This chapter informs both research and practice
through its presentation of the findings of an in-
depth case study of LMS implementation and use
by a large US multinational high-tech firm (CEM
Corp.). As such, it provides insights into the roles
that LMS can play in the continued commercial
success of such organizations. The findings of this
case study illustrate that LMS offer a strategic IS
solution for planning, delivering and managing
all learning events, including both online and
classroom-based learning. Practitioners recognize
the need for such systems; for example, many
world-class organizations are employing learn-
ing management to foster and manage learning
within their organizations—such organizations
include Amazon.com, Cisco Systems, Continental
Airlines, Deloitte Consulting, EDS, Ford Motor
Company, General Electric, and Procter & Gam-
ble. CEM adopted the KnowledgeLink Learning
Management System for the same reasons. Of
significance is that this chapter presents an inven-
tory of roles that Learning Management Systems
plays in this organization. Also described are the
practical experiences and issues encountered by
CEM in their approach to building human capital
using their LMS. The findings of this study indicate
that, to some extent, the KnowledgeLink LMS
fulfilled all of the roles suggested in the proposed
conceptual framework; however, because the
system was still at an early stage of use, some
of the functions were found to be more highly
developed than others. Furthermore, the case
study identified a number of additional roles for
LMS in enhancing human capital that were not
suggested in the framework, but were operation-
alized by the KnowledgeLink technology. The
chapter then closes by offering some suggestions
for future research directions and outlining the
implications for practice.
HuMAn CAPiTAl AnD lEARninG
MAnAGEMEnT sYsTEMs
The importance of facilitating and managing learn-
ing within organizations is well accepted. Zuboff
(1988), for example, argues that learning, integra-
tion and communication are critical to leveraging
employee knowledge; accordingly, she maintains
that managers must switch from being drivers
of people to being drivers of learning. Harvey
and Denton (1999) identify several antecedents
which help to explain the rise to prominence of
organizational learning, viz.
• The shift in the relative importance of
factors of production away from capital
towards labor, particularly in the case of
knowledge workers.
• The increasing pace of change in the busi-
ness environment.
• Wide acceptance of knowledge as a prime
source of competitive advantage.
235
 Building and Maintaining Human Capital with Learning Management Systems
• The greater demands being placed on all
businesses by customers.
• Increasing dissatisfaction among managers
and employees with the traditional ‘com-
mand control’ management paradigm.
• The intensely competitive nature of global
business.
A HuMAn CAPiTAl PERsPECTiVE
on TRAininG AnD lEARninG
The challenge facing organizations is, therefore,
to build and enhance their stock of human capi-
tal. Drawing on human capital theory (Becker,
Murphy, & Tamura, 1993), and on later insights
in transaction cost theory (Williamson, 1985),
Nordhaug (1994) delineates how this can be
achieved by illustrating how training and learn-
ing underpins the development of knowledge
and skills, which, in addition to aptitude, shapes
individual and organizational competences.
Nordhaug (1994) distinguishes between the role
of informal (i.e. part of the socialization process
in organisations) and formal (through training,
education etc.) learning in competence develop-
ment. He illustrates that unique organizational
competences, which are highly firm specific, are
a function of firm specific intra-organizational
competences, non-firm specific industry and
technical trade competences, and, ultimately,
general meta-competences and standard technical
competences. Most important, however, is his as-
sertion that human capital is best viewed through
a competence lens; that is, accounting for human
capital should focus on matters of individual and
organizational competence, and that the develop-
ment of human capital is, in essence, an exercise in
competence development, which involves training
and learning. This, then, is this chapter’s point of
departure in understanding how IT-based systems
can enable training and foster learning, thereby
building an organization’s human capital.
236
iT-BAsED lEARninG
MAnAGEMEnT sYsTEMs
It is perhaps time to admit that neither the ‘learning
organization’ concept, which is people oriented
and focuses on learning as a process, nor the
knowledge management concept, which focuses
on knowledge as a resource, can stand alone. These
concepts complement each other, in that the learn-
ing process is of no value without an outcome,
while knowledge is too intangible, dynamic and
contextual to allow it to be managed as a tangible
resource (Rowley, 2001). She emphasizes that suc-
cessful knowledge management needs to couple
a concern for systems with an awareness of how
organizations learn. Researchers believe that what
is needed is to better manage the flow of infor-
mation through and around the “bottlenecks” of
personal attention and learning capacity (Wagner,
2000; Brennan, Funke, & Andersen, 2001) and to
design systems where technology services and
supports diverse learners and dissimilar learning
contexts (McCombs, 2000). In response to these
needs Learning Management Systems (LMS)
evolved; accordingly, an increasing number of
firms are using such technologies in order to adopt
new approaches to learning within their organiza-
tions. This new ‘learning management’ approach
has been led primarily by practitioners and IT
vendors: as it is a relatively new phenomenon,
there is a dearth of empirical research in the area.
Therefore, an important challenge for researchers
and practitioners to better understand LMS and to
examine the role that these new systems play in
developing human capital in organizations.
REsEARCH METHoD
This study’s primary objective is to examine
how LMS may be utilized in an organizational
context to facilitate and manage organizational
training learning and develop organizational
competences and, ultimately, human capital. A
Building and Maintaining Human Capital with Learning Management Systems
case study approach was selected for three key
reasons. Firstly, the case study research method
is particularly suited to information systems (IS)
research (Benbasat, Goldstein, & Mead, 1987;
Myers, 1997), since the objective is the study of IS
in organizations and “interest has shifted to orga-
nizational rather than technical issues” (Benbasat
et al., 1987). Case research, with its emphasis on
understanding empirical data in natural settings
(Eisenhardt, 1989) is an appropriate method for
studying IS issues and practices. Furthermore,
Benbasat et al. (1987) maintain that IS researchers
should learn and theorize primarily from studying
systems in practice, as much IS research trails be-
hind practitioners’ knowledge. Indeed, this is the
case with respect to the availability of empirical
research on LMS. Secondly, the objective of the
research is exploratory in nature and the single
case study is considered to be a potentially rich
and valuable source of data and is well suited to
exploring relationships between variables in their
given context, as required by exploratory research
(Benbasat et al., 1987; Yin, 1994; Stake, 1994).
Thirdly, the main argument against single cases
has been answered by Lee (1989). He points out
that single cases differ from multiple cases only in
their degree of generalizability and in this sense,
the ‘lessons’ learned from our case have been
formulated as postulates, with specific view to
their validity being confirmed, or otherwise, in
future research. Field work was undertaken over a
period of 10 months, commencing approximately
a year and a half after the LMS went live. A range
of key informants and users of the LMS were in-
terviewed and observed during this period, from
the company’s engineering, technical training,
and HR functions.
A CAsE sTuDY oF CEM’s
lEARninG MAnAGEMEnT sYsTEM
CEM Corporation is a global US-based high-tech
company with over 20,000 employees spread
across several continents. In February 2001, CEM
Corporation deployed a Learning Management
System known as Saba Learning Enterprise™ to
employees across the entire organization, as well
as to CEM customers and business partners. This
corporate-based system is used to deliver and
track training programs and formulate learning
across multiple functions within the organization,
including technical functions; business functions;
IT professional functions; and management func-
tions. The system is also used to deliver and track
individual personal development training. Hosted
at CEM’s corporate offices in the United States,
the system is accessible through the internet via a
virtual private network and has been customized
for CEM. CEM employees may sign on to the
system through an CEM specific web applica-
tion interface called KnowledgeLink. A separate
web application interface known as PowerLink
provides customized access for customers and
partners. The business drivers for deploying this
enterprise learning solution were:
• Decrease time-to-competency.
• Develop and manage skill sets for all
employees.
• Leverage global, repeatable and predict-
able curriculum.
• Integrate competency assessments to de-
velopment plans.
• Accelerate the transfer of knowledge to
employees, partners, and customers.
• Provide a single learning interface for all
internal and external users.
Subsequent to the rollout of this system,
CEM Corporation encountered tough economic
conditions globally and entered a period of ra-
tionalization and cost cutting. According to the
KnowledgeLink Manager, “from the perspective
of CEM, the new Learning Management System
provided an opportunity to decrease its own costs
by extending online learning from a primarily tech-
nical focus, to incorporate the skills and aptitudes
237
 Building and Maintaining Human Capital with Learning Management Systems
Figure 1. CEM Enterprise Learning Solution Components
needed throughout the organization. It presented
many new possibilities including more efficient
use of the existing Learning Centre facilities for
delivery of internal courses, the maximization of
learning across the organization and improved
performance though increased competencies.”
He added that “all in all, it was seen as a mecha-
nism which would enable CEM to position itself
strongly as a learning focused organization, and
potentially as an exporter of knowledge within
CEM Corporation.”
Enterprise learning
solution Components
As illustrated in Figure 1, CEM’s Enterprise Learn-
ing Solution consists of many components. Much
of the learning material is created and maintained
by CEM employees using a number of products
including Microsoft Office, Adobe Acrobat and
238
Saba Publisher. Content is stored on CEM’s own
storage repository, on site. In addition, courseware
that is created and maintained directly by third par-
ties is stored offsite in the storage repository of the
third party organization. Courseware is provided to
CEM by a number of third party learning content
suppliers, including KnowledgeNet and Netg.
While all learning content is primarily provided
to CEM employees through KnowledgeLink, it
is also possible to access some of the third party
courseware directly through the internet.
Employees may use KnowledgeLink to man-
age their own learning processes, for example
– they may enroll in classroom courses, search
for learning material, engage in an online learn-
ing activity, or look at what development options
are suitable for their role within the organization.
Managers may use the system to manage the learn-
ing processes of their employees, for example,
they may examine the status of learning activities
Building and Maintaining Human Capital with Learning Management Systems
for their employees; assign learning initiatives to
their employees; and generate reports on learning
activities. Administrators and training personnel
may use the system to administer and manage
employee training, for example, they may publish
and manage learning content; manage the cata-
logue of courses; and create reports on learning
activities. While much of the required reporting is
provided by KnowledgeLink, administrators also
use third party software called Brio to generate
more sophisticated reports.
KnowledgeLink has the capability of man-
aging and tracking both offline activities (e.g.
books, ‘on the job’ training, mentoring, classroom
training) and online activities (e.g. video and
audio, rich media, webcasts, web-based training,
virtual classroom training). In the case of online
activities, learning content may be accessed and
delivered through KnowledgeLink either from
CEM’s repository or from the third party’s storage
repository. Certain testing is built into the learning
content itself, but additional pre-training-testing
and post-training-testing may be invoked and this
is provided by another third party product called
QuestionMark.
learning Management system Roles
This section presents the findings of the case study
and answers the question: “What are the roles of
the Learning Management System in managing
learning within the organization?” This question
is addressed chiefly by reviewing the potential
roles of Learning Management Systems. These
roles are listed as:
• Support training administration.
• Support diverse learners within diverse
learning contexts.
• Facilitate competence development to meet
particular business objectives.
• Enable cohesive learning throughout the
enterprise.
• Encourage accountability for learning
among employees.
• Enable monitoring/analysis of the status of
learners within the organization.
This part of the research will establish if Knowl-
edgeLink fulfils these roles and if there are any
additional key roles that it serves. The findings
for each of the roles are presented in turn.
Supporting Training Administration
One of the key roles of Learning Management Sys-
tems is to support training administration (Barron,
2000; Brennan et al., 2001; Zeiberg, 2001). Many
of the interviewees agreed that KnowledgeLink
was primarily used by training facilitators to au-
tomate training administration and that this is still
one of the more important roles of the system. The
Training Manager within the Customer Services
Organization Asia Pacific commented that “the
main role of KnowledgeLink is to automate train-
ing administration tasks and then to add value.”
Through the ‘Catalogue Management’ function,
trainers enter details of upcoming training classes,
invite people to register for these classes online
and then subsequent to the training program, they
use the system to record and track the details of
the class. The interviewees confirmed that the
areas primarily supported by KnowledgeLink in
the area of training administration are:
• Training registration: Employees may
register for a course or learning activity
from many areas within KnowledgeLink
including: the enrolments page; through
clicking on the product title when viewing
development options in the competency
function; and by searching the learning
catalogue.
• Scheduling training: Instructor led classes
are all scheduled on KnowledgeLink and
this gives visibility to all potential learners
239
 Building and Maintaining Human Capital with Learning Management Systems
of upcoming training which they may wish
to attend.
• Delivery of training: KnowledgeLink is
used as a central gateway to deliver elec-
tronic courses and electronic learning
content.
• Training testing and tracking: While
much of the pre-learning and post-learn-
ing testing for both electronic learning
and classroom-based learning is carried
out outside of the system (either as part of
the learning content itself or through the
QuestionMark software), the results are
recorded and tracked on KnowledgeLink
and may be viewed within the transcript
of learning activity, maintained for each
learner.
A number of the Training Managers inter-
viewed spoke about the difficulties they had in
getting administration rights in order to administer
their own training on KnowledgeLink, though
they have had administration rights for some time
now. They are using these administration rights to
manage learning content, manage the catalogue
of learning activities and to generate reports on
training programmes and individual learning
activities. One interviewee commented that “if
you want to get a system out there and get people
to use it, you cannot centralize the administra-
tion of it. If you have to go to someone, ask them
can you do this for me and get someone’s time,
you’re just not going to use it...the more red tape
you have, the less effective it becomes.” Access
rights are slowly being given to the appropriate
individuals in other divisions of CEM. At this
point in time, some of the administration is still
being carried out centrally in the United States
– for example, entering of development options
for competency models, logon and access rights,
reporting capabilities, etc.
240
Supporting Diverse Learners
within Varied Learning Contexts
McCombs (2000), Wagner (2000) and Brennan
et al. (2001) maintain that one of the biggest fac-
tors to the success of information technologies in
learning is the ability to support diverse learners
within diverse learning contexts. KnowledgeL-
ink does support a large number of learners with
varied roles, responsibilities and training needs
across the organization, as it supports over 17,200
across the CEM Corporation. KnowledgeLink
provides access to a large central repository of
varied learning material which is organized in a
structured way. As one interviewee who is a user
of the system put it, “people can identify their role
and cross reference KnowledgeLink for recom-
mendations…the system also provides guidance
with paths through the training courses.” Courses
supported include; technical courses; customer
service focused courses; sales focused courses;
soft-skill or personal development courses;
product courses; accountancy-based courses; and
many more. KnowledgeLink was found to be able
to support diverse learning contexts including;
in class instruction; training manuals or books;
audio and video training; multimedia training and
virtual classroom training.
However, the HR Information Systems Spe-
cialist stressed that KnowledgeLink may be more
suitable for corporate training and standard train-
ing that can be rolled out across the organization
on an ongoing basis, rather than specialist or once
off training. She said “manufacturing guys use it
quite a bit for their technical training programmes
because the manufacturing training is generic
across the manufacturing sites in CEM…it’s the
same for Customer Service.” She explained that
software engineering has very much done their
own thing and that they use a separate website for
training administration and tracking. This system
Building and Maintaining Human Capital with Learning Management Systems
is ISO9000 compliant and was in place before
KnowledgeLink was implemented. A Software
Engineer commented that “there doesn’t appear
to be a large amount of suitable training available
for software development through KnowledgeL-
ink…..it seems to be focused at Manufacturing and
Customer Services.” He added that the company’s
Open Software Group produces its own training
videos and disseminates these directly to software
organizations throughout CEM. However, Knowl-
edgeLink is used by the Software Engineering
Organization for training on CEM application
programs and for corporate training.
Facilitating Competence Development
to meet Particular Business Objectives
A typical Learning Management System should
permit competency mapping and facilitate map-
ping of career development paths by measuring
an individual’s competency level and then guiding
the learner to the most appropriate course to fill
any skill gap (Brennan et al., 2001). Hall (2001)
argues that when used to their full potential,
Learning Management Systems enable mapping
of knowledge and competencies to specific busi-
ness objectives. CEM is now beginning to facili-
tate competence development to meet particular
business objectives through KnowledgeLink in
two distinct ways. The first of theses is ‘from the
top down’. Many departments within CEM have
begun to use KnowledgeLink to automate the
training needs analysis process and thus centralize
training planning. Previously, this was primarily
a manual process whereby training managers
would survey employees within a department in
relation to their skills and abilities. They would
then collate the results on an excel spreadsheet,
subsequently they would draft training plans which
attempted to address the main training needs of that
department. Through KnowledgeLink, competen-
cies are assessed using role-based competency
models, and thus trainers can identify all training
needs for each job role type. Subsequently they
can develop training plans to meet those needs.
From a management perspective, it is possible
for a manager to get an overall picture of the
competency levels within their department that
will help them to identify competency deficiencies
or indeed, competency overlaps. Furthermore,
a manager will be able to see how competency
levels within their department compares with
similar departments elsewhere within CEM. The
Service Support Manager, EMEA pointed out that
“although it started as just automation of train-
ing needs analysis, managers then saw that they
can get a picture of training gaps and average
competency levels world-wide…they can also see
overlaps in competencies.”
The second manner in which CEM is begin-
ning to facilitate competence development to
meet particular business objectives is ‘from the
top down’. KnowledgeLink facilitates a com-
petency assessment process which enables an
employee to identify gaps or shortfalls in their
competency levels with respect to the compe-
tency model associated with their own specific
job role. As outlined earlier, learners may select
development options which will help develop
deficient competencies and subject to the passive
approval of their manager, the learner can carry
out the necessary learning activity to acquire the
competence. These development plans may also
specify pre-requisite training or knowledge, thus
facilitating a certain amount of control over the
order and structure of training.
The competency model for Product Software
Engineers (PSEs) within Global Technical Sup-
port, EMEA, contains 165 competency assessment
questions which examine competency levels
within 29 competency categories (questions on
each category are not grouped together and are
dispersed throughout the questionnaire) and also
contains a free text area for additional informa-
tion. This model was created by the training man-
ager within Global Technical Support, EMEA, in
consultation with a number of individual PSEs.
The model assesses both technical skills (65%)
241
 Building and Maintaining Human Capital with Learning Management Systems
and soft skills (35%) and takes approximately 25
minutes to complete. Competency levels range
from between ‘competence level 1’ and ‘compe-
tence level 5’.
While competence models already exist
on KnowledgeLink for many roles, standard
competency models do not yet exist for all role
types. Training managers in each area are cur-
rently working through a process of drawing up
a standard competency model for each role type
by collaborating with groups of employees who
hold that particular role type. The KnowledgeLink
Manager pointed out that many roles (particularly
senior roles such as manager, supervisor and team
lead) have generally standard competencies and
that devising competence models for these roles is
straightforward because they can be benchmarked
against similar roles in the industry. However, he
emphasised that “as you drill down, you find that
there are a lot of specialist functional competen-
cies and you get into the ROI question. Because
there is such a large investment in time and effort
involved in devising competence models for all
technical roles, it has to be driven by the local
business needs.”
It was emphasized by the KnowledgeLink
Manager that although competency models fa-
cilitate the specification of certain skills which
are needed to fulfill a particular job role, there are
some limitations to this approach. One limitation
was stated as “…the difficulty in having accurate
competency models for all roles when there is such
a vast array of diverse technical positions.” This
was re-iterated by two other interviewees, who
explained that a particular group of employees
in their department held only a small number
of common competencies, yet they had a lot of
specialist skills. One interviewee asked “do you
have a separate competency assessment for each
specialist skill, or do you have a competency as-
sessment model with 500 questions in it?...if you do,
people will strike ‘not applicable’ to it.” Further-
more, this interviewee highlighted the difficulty
in measuring the same competencies across two
242
areas which have a different emphasis on depth,
versus breath, of knowledge. For example, one
area where depth of product knowledge is critical
is in ‘technical problem solving for a particular
CEM product’, yet another area like ‘technical
problem solving for general customer queries’
may require a greater breath of knowledge on
various products, but may not require a profound
knowledge in any one product area.
Another limitation of the competence models
highlighted by a number of interviewees related
to when these models are used for the purposes
of a performance review. The apportioning of a
weighting of 25% to the learner and a weighting
of 75% to the manager/mentor was questioned as
it may be inappropriately geared in favour of the
manager/mentor. This may cause difficulties if the
manager/mentor is not entirely familiar with all
of the competencies assessed or if the manager/
mentor is not fully aware of the learner’s abili-
ties in each of these areas. The KnowledgeLink
Manager argued that “performance assessment
must be a joint agreement, which has the buy-
in and support of the assessee. They must both
jointly generate a development plan which uses
the KnowledgeLink competency models, but also
incorporates suggestions from both the assessor
and the assessee.” Another interviewee pointed
out that the ideal scenario in allowing an employee
to develop and grow involved a two pronged ap-
proach. He stressed that “one approach should be
geared towards a training plan that enables the
employee to do their job properly and the other
approach should be geared towards the career
development of the individual by helping him/her
to establish what training they would need in order
to develop their own career ambitions.”
In sum, the research findings illustrate that
KnowledgeLink is beginning to fulfill the role of
facilitating competence development to meet par-
ticular business objectives. This is being achieved
through both a top down approach and bottom up
approach to learning management. From a top down
perspective, Training Managers within CEM are
Building and Maintaining Human Capital with Learning Management Systems
beginning to use KnowledgeLink to automate the
‘training needs analysis’ process which will assist
them in the identification of training needs and
will support training planning. From a bottom up
perspective, CEM is encouraging employees to self
manage their own learning using KnowledgeLink.
They may carry out competency assessments
against the standard competency model related to
their own particular role, and subsequently they
may review learning options available and devise
development plans to acquire the competencies in
which they are deficient. Finally, although role-
based competency models have been set up on
KnowledgeLink for many of the customer facing
roles, CEM is still in the early stages of construct-
ing workable competency models for all job roles
within the organization.
Enabling Cohesive Learning
throughout the Enterprise
Greenberg (2002) maintains that LMS replace
isolated and fragmented learning programs with
a systematic means of assessing and raising com-
petency and performance levels throughout the
organization. This study illustrates that learning
plans for individuals are not coordinated in sync
with any overall learning plan, but are aimed to
meet particular role competencies and are either
self directed or are controlled by the manager of the
individual. From this perspective, KnowledgeLink
facilitates consistency and cohesion by allowing
standardized competency models to be defined and
by enabling development plans to be constructed
in order to achieve the competencies outlined in
the competency model. Furthermore, although
curricula are not yet provided for all roles, some
curricula or training maps are provided on the sys-
tem for key technical, sales and customer service
roles, and these may be used to guide the sequenc-
ing of developmental plans. The KnowledgeLink
Manager stated that “although KnowledgeLink
does not provide a learning development plan for
the entire organization…..it can, however, provide
status report on all competency levels and these
may be analyzed manually in order to establish
an overall learning development plan.”
Encouraging Accountability for
Learning among Employees
Hall (2001) suggests that Learning Management
Systems increase employee and manager account-
ability for learning and performance results. It
was found that KnowledgeLink has the capability
to be very ‘learner focused’ and to be strong in
encouraging accountability for learning among
employees and managers. The KnowledgeLink
Manager pointed out that “self assessment is
facilitated and self directed learning is offered,
which has passive approval.”
The Training Manager of Customer Services
in Asia Pacific stated that “the development of an
individual may be guided by a number of factors
including: corporate compliance requirements;
competencies required to fulfill a particular role;
and self assessment carried out by the individual
themselves.” However, it was stressed by the
KnowledgeLink Manager that “at the end of the
day, the onus is back on the employees to develop
themselves.” It was also generally agreed among
the respondents in this study that this depends to
a large extent, on the level of motivation of the
individual. It was found that the process of self
planning of career development has for the most
part, not been taken up as yet within the organiza-
tion. A number of potential reasons for this were
discovered and these are outlined below.
One interviewee highlighted that “many em-
ployees may still feel that the system is primarily
designed for course registration and the other
elements of the system may need to be emphasized
more internally.” He was also of the opinion that
CEM may not be entirely effective in promoting
and marketing the downloadable learning material
that is on KnowledgeLink. This was supported by
his observation that “if people venture in there
and snoop around, they’ll find some good stuff,
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 Building and Maintaining Human Capital with Learning Management Systems
but they’ll stumble across it…but it won’t be pre-
sented to them to say that this is now available on
KnowledgeLink.” Furthermore, another intervie-
wee pointed out that notification about upcoming
training courses is emailed to managers currently,
but not to employees. This interviewee pointed
out that “some courses like new product training
or web-based training may get missed.”
It was claimed by one interviewee that “al-
though the initial rollout of KnowledgeLink seems
to have been good and although there is a grow-
ing awareness of the system, people still have not
got to grips with using it…..we should possibly
promote it more internally and formalize its use
within the review process.” Another interviewee
argued that “some employees may fear that if they
use the system to log their competencies, their
career may be negatively affected.”
It was found that the mobilization of Knowled-
geLink may lack the support and buy-in of senior
management. Within CEM the initiative is being
driven by a number of key Training Managers.
They have been running a number of pilot projects
which aim to get buy-in from employees to engage
with the competency assessment process and fol-
lowing on from this, they hope to get more support
from senior management and directors within the
organization. Ensuring that adequate training and
learning takes place in the organization is part
of the remit of the Human Resource Directors,
but this is only one of their many demanding
priorities. Therefore, no one director at CEM is
primarily focused on training and learning, and
no one director has the objective of maximizing
learning using KnowledgeLink.
One cultural difficulty outlined by one of the
interviewees was that “some supervisors may
object to individuals on their team engaging with
KnowledgeLink and seeking additional training
for themselves.” He had seen this happen in the
organization and maintained that these supervisors
may have felt that it would upset the status quo
of their team, in which all members tend to have
a similar set of skills and competencies.
244
Finally, one interviewee stated that “there has
been some discussion about running an organi-
zational wide re-grading program that requires
everyone to sign onto the system within a specified
timescale and to carry out a self assessment.”
The key difficulty with this is that competency
models for all role types would have to be in
place prior to the running of the program. A more
realistic scenario is that competency models will
be done, ‘piecemeal’, throughout the organiza-
tion and employees will over time, be migrated
onto KnowledgeLink for the management of their
own competencies, though there is no structured
plan or roadmap in place to guide this migration
process.
Enabling the Monitoring and
Analysis of the Status of Learners
Learning Management Systems can help admin-
istrators and management to target, deliver, track,
analyze and report on their employees’ learning
status within the organization (Nichani, 2001).
The KnowledgeLink Manager explained that “the
status of competencies within the organization
may be reported by KnowledgeLink at a number
of different levels.” Status of competencies may
be reported at an individual level; at project team
level; at section level within a department; and at
department level. This report may be time-based
or may specify all competencies that have been
acquired by those employees. While status of com-
petencies is not reported at organizational level,
the usefulness of such a report was questioned
by a number of interviewees, because this would
contain large numbers of diverse and unrelated
competencies within a large organization, such as
CEM. The KnowledgeLink Manager also argued
that “through the competency assessment process,
KnowledgeLink can support a manager in as-
sessing an employee’s role-based competencies…
and having agreed development plans with that
employee, a subsequent competency assessment
can help that manager to determine the employee’s
Building and Maintaining Human Capital with Learning Management Systems
‘learning performance’ in acquiring the new
competencies, as per the development plan. This
‘learning performance’, he added, “may then
form part of the overall performance review for
the employee.”
CEM also has a database called SkillsCentre,
which contains a skills inventory matrix for ev-
erybody in the organization and this database is
updated regularly by each employee. Currently,
there are no links between KnowledgeLink and
SkillsCentre. One interviewee raised the concern
that this database may not be widely used because it
may be “at a level of granularity that is not useful.”
Another issue raised and potential source of confu-
sion was that the ratings for skills on SkillsCentre
range between level 0 and level 4, whereas the
ratings for skills on the KnowledgeLink system
range between level 1 and level 5.
Additional Key Roles and
Attributes of the lMs
A number of other key roles of KnowledgeLink
were identified by the interviewees. It was the
view of a number of the interviewees that Knowl-
edgeLink increases training productivity. As one
Training Manager put it “with KnowledgeLink,
the volume of work that you can get through is
greater…it improves the efficiency of delivering
and managing training.”
Because KnowledgeLink contains a central
repository containing details of all available train-
ing within the organization in a structured way,
it emerged during the interviews that Knowled-
geLink has helped to improve the profile of the
training organization and has also stimulated an
increase in the use of training within CEM. One
Manager argued that “KnowledgeLink has really
improved the profile of the Training Organiza-
tion…before it was known that the Training Orga-
nization facilitated training, but you couldn’t put
your finger on something…now there is a central
repository and you can see all the training that is
being delivered.”
The KnowledgeLink Manager highlighted
that another key role of KnowledgeLink is the
provision of post learning support. He outlined
that “although this function is not yet extensively
used, KnowledgeLink enables employees to access
their transcript, and through this transcript they
may rerun material from a course or download
documents associated with it.” A less obvious
role of KnowledgeLink was outlined by an in-
terviewee who carries out a technical role within
CEM. He maintained that “KnowledgeLink acts
as a flagging mechanism for the changing nature
of CEM’s own products because when new train-
ing becomes available on KnowledgeLink, this
normally signals either that new product features
have been released or that product changes have
taken place.”
ConClusions
The deployment of CEM’s LMS enabled the
corporation to address many of the challenges
that it faced prior to the system’s implementa-
tion. For example, the company now has a single
Enterprise Learning Solution which supports
the administration of all training across the en-
tire organization. From the point of view of the
employees, the system provides a centralized
mechanism which enables them to search for and
to enroll in selected courses or training programs:
it also offers guidance on recommended training
paths and curriculums. Furthermore, the compe-
tency assessment facility enables employees to
determine and rectify competency gaps as well
as providing management at CEM with a means
of monitoring and managing overall employee
competency levels within the organization. In
addition, the LMS solution supports all training
content whatever its subject matter or form and
enables the management and control of access to
this content using one system. This has the added
advantage of highlighting duplication of training
material in different parts of the organization and
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 Building and Maintaining Human Capital with Learning Management Systems
paves the way for streamlining the efforts of dif-
ferent training services within the company. In
addition, the flexibility and dynamic nature of the
system allows CEM Corporation to unilaterally
introduce and to quickly implement new training
requirements across the organization in response
to changing business needs or new technical ad-
vances. The LMS may help to attract or retain key
personnel by offering them a unique opportunity
to monitor and develop their competencies and to
manage their careers within the organization.
As indicated, CEM Corporation is a hi-tech
organization which operates in a very competitive
and dynamic business environment. Managing
learning and measuring learning outcomes are
in themselves difficult tasks, but they are made
even more problematic within complex technical
and engineering learning domains, such as those
that exist at CEM. It is unlikely that the LMS will
enable the full management of all of the learning
and develop the organization’s human capital in a
‘truly scientific way’ (cf. Nordhaug, 1994), though
it will assist greatly in managing the diverse and
extensive array of learning contexts and learning
processes that must be supported. The system’s
strengths lie in the new approach and attitude
that it will encourage and inspire in the hearts
and minds of individuals within the organization,
as it enables training, learning and competence
development that is highly visible, structured,
and more accessible within the organization.
This is achieved by improving the control and
management of employee competency levels, and
also by empowering employees to be creative in
managing their own learning and competency
development. Thus, the key challenge for man-
agement at CEM is to increase their influence
and control over training and learning within the
organization, while at the same time increasing
employee commitment to managing their ongo-
ing self development by taking responsibility for
improving their knowledge of the business and
building unique and intra-organizational compe-
tences, as per Nordhaug (1994). It is clear that
246
these objectives are delicately balanced and must
therefore be handled carefully. Too much control
may de-motivate employees and discourage them
from engaging with the system, but at the same
time, enough control must be exerted to ensure
that employees are developing competencies that
support the day-to-day operational requirements of
the organization, as well as being in sync with the
overall goals and objectives of the company.
One important consideration facing CEM Cor-
poration is that it has a long way to go to before
all of the benefits offered by their LMS can be
fully exploited. Not all formal training is currently
being tracked and managed through the LMS and
some departments independently organize their
own training outside of the system. One engineer
argued that “there doesn’t appear to be a large
amount of suitable training available for our
department.” The benefits offered by this Enter-
prise Learning Solution will not be fully realized
until sufficient training or learning programs are
offered to all employees in all departments within
the organization. Furthermore, while it is possible
to take certain online training directly through
the Internet, it is not possible to track or manage
associated learning outcomes, as this training is
initiated and completed outside of the LMS, and
is not currently recorded by it. It is understand-
able that it will take some time to incorporate all
every training program for all employees onto
the system, but it is critical that this is achieved
as quickly and efficiently as possible, to ensure
support for the system and ongoing use of the
system across the entire organization.
At the time of study, role-based competency
models had not yet been drawn up for all roles
within the organization. Competency assessments
are instrumental to determining if positive learn-
ing outcomes have been achieved and they will
also demonstrate if the organization is obtaining
a return on its investment in implementing and
deploying the LMS. Furthermore, competency
assessments offer management at CEM an oppor-
tunity to identify and rectify gaps or overlaps in
Building and Maintaining Human Capital with Learning Management Systems
competency levels as well as providing a means of
assessing and managing overall competency levels
within the organization. Even where competency
models are available, the study revealed that the
process of self management of career development
has, for the most part, not yet been taken up within
the organization. Moreover, many employees, and
indeed managers, have not yet engaged with the
competency assessment process. A structured plan
or roadmap needs to be formulated in conjunction
with local business needs for the formal migration
of all employees onto the system for competency
assessment and competency development plan-
ning to take place.
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 249

Chapter 15
Multinational Companies and
their Link to the Intellectual
Capital of Territories:
A Proposal of a Tool to Evaluate
the Sustainable Development of the
Region through its Intangible Assets
Agustín J. Sánchez Medina
University of Las Palmas de Gran Canaria, Spain

ABsTRACT
Nowadays it seems to be widely accepted that a multinational company has many different environmen-
tal, economic or social impacts on a territory. Moreover, every region has the right to aim to achieve
sustainable development. For those reasons, this work proposes a tool based on the territory’s intangible
assets. This tool allows the management of the sustainable development of a region where a multina-
tional company has located, paying special attention to the way that this type of company can influence
the development of the region.

inTRoDuCTion It is clear that the location of a multinational

One of the unexpected consequences of the current
stage of globalisation is that academics, national
governments and some supranational organisations
must think again about the nature and purpose of
the development that is taking place in territories
and the way in which multinational companies must
contribute to that development (Dunning, 2006;
Dunning & Fortanier, 2007).
DOI: 10.4018/978-1-60566-679-2.ch015
company in a territory causes economic, social or
environmental impacts. Proof of that can be found
in the works of Cantwell and Iammarino (2001),
Collings (2003), Dunning (2006), Dunning and For-
tanier (2007), Escobar and González (2006), Evans
(2003), Innes and Morris (1995), Kumar (2001),
OECD (2000), Rondinelli (2007), Rondinelli and
Berry (1999), Rosenzweig and Singh (1991), Yan-
naopoulus and Dunning, (1976) and Young et al.,
(1994) among others. The aforementioned impacts
can be positive for the region, such as higher em-

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 Multinational Companies and their Link to the Intellectual Capital of Territories
ployment or the economic improvement of the
regional suppliers of multinational companies, and
that is why the territories themselves sometimes
encourage the location of this kind of company
(Evans, 2003; Yannopoulus & Dunning, 1976).
However, there may also be negative effects, such
as damage to the environment, or even serious
problems such as those that occur when a deter-
mined region’s economic and population growth is
fundamentally based on the economic contribution
of, and the jobs directly or indirectly created by,
a multinational which, with the passing of time,
decides to withdraw from the region.
Stiglitz (2002) states that the development of
regions must be considered in a more balanced
overall way, with higher social inclusion and in a
much more participative way than previously. It
is notable that economists such as Amartya Sen
consider that the development of a region has to
take into account, on the one hand, issues such
as the decreasing of poverty, tyranny, the lack
of economic opportunities and public services,
government repression and, on the other hand, the
promotion of free choice of opportunities, with
freedom as the main aim of development (Sen,
1999). However, according to Dunning (2006),
some multinational companies have not under-
stood development in such a comprehensive way.
In spite of that, corporative social responsibility
is now becoming a more important issue for com-
panies as a consequence of other issues, such as
the financial scandals in which large companies
like Enron and Worldcom (Escobar & González,
2006) have been involved, greater citizen aware-
ness of social and environmental problems and the
will to have a better image and customer loyalty.
Moreover, companies have noticed that having a
good reputation for social responsibility facilitates
their access to funds and even improves their
financial results (Williams et al., 1993). That is
how concern for social responsibility has spread
among multinational companies, and this is ap-
plicable in developed and undeveloped countries
alike. A large number of multinationals have cre-
250
ated volunteer environmental programs in order to
manage the environmental impacts of their facili-
ties, installations and operations more efficiently.
Moreover, if these kinds of measures are always
important, they are even more important when
the multinationals are located in undeveloped
countries with sensitive environmental and social
conditions and non-existent or underdeveloped
legal regulation (Rondinelli, 2007).
In his well-known work “The Prince”, Nicolas
Maquiavelo states that, when the Prince wants to
gain prestige, he must take grand actions, set an
example in the inner affairs of the Principality
and be a true friend. The Prince must also avoid
the things that could make him hated or despised
(Maquiavelo, 1998). Making a parallel between
those words and a multinational’s social responsi-
bility to the territory where it is located, we could
say that its image improves when the company
is involved in great actions that are positive for
the sustainable development of the region, when
it establishes internal practices that are coherent
with this kind of development and when it is
really in tune with the region’s authorities and
inhabitants and pursues a common objective
with them. Moreover, companies should avoid
bad practices that could lead to image problems
among the population.
In spite of that, there is still some debate among
experts about corporate social responsibility. Some
of them think that companies, as legal entities, have
just two kinds of responsibility: to earn money for
their shareholders and to comply with the legal
regulations to which they are subject. However,
others believe that the stakeholders should also
be taken in consideration. This work is framed
within the latter hypothesis.
The World Business Council for Sustainable
Development defines corporate social responsibil-
ity as the ethical behaviour of a company towards
society, in other words, responsible action in
their relationships with other stakeholders that
have a true interest in the business, and not only
with the shareholders (WBCSD, 1998). AECA
Multinational Companies and their Link to the Intellectual Capital of Territories
(2004) states that corporate social responsibility
is the voluntary commitment of companies to the
development of society and a social commitment
to conserve the environment and behave respon-
sibly toward the people and social groups with
whom they interact.
Sen (1999) states that, if a more sustainable de-
velopment is be achieved, it is essential to improve
the region’s institutions. Another Nobel Laureate,
Douglass North, also stresses the importance of
the territories’ formal and informal institutions to
their appropriate development (North, 1990; 1994;
2005). However, according to Dunning (2006),
there are few empirical works that support North’s
opinion; some works, such as that of Rodrik, et al.,
(2002) which analyses the social development of
140 countries in the last century, conclude that the
quality of regional institutions and their corporate
capital are key indicators to distinguish those
that achieve rapid development from those that
develop slowly. Moreover, Dunning (2006) states
that many recent studies of the determinant factors
in the location strategy of multinationals consider
different indicators of institutional development
and social abilities. Thus, market deregulation,
entrepreneurship, educational improvement, the
reliability of communications, less bureaucracy,
and policies to increase competitiveness are among
the key variables in this kind of decision.
However, Sen (1999) acknowledges the dif-
ficulty of measuring or evaluating the kind of
development that he suggests but states that it
must begin with an increase in freedom and the
establishment of indices that allow the wellbeing
of human beings to be measured. To start with,
and in order to respond to the above questions,
this work proposes and develops a tool based on
intangible assets, which allows the management
of the territory’s sustainable development: this
management will also pay special attention to the
relationship between the company and the terri-
tory. The tool could be useful to test compliance
with the OECD Guidelines for the Multinational
Enterprises (OECD, 2000). If we follow the state-
ment of North (1990), in which he says that the
institutions are the rules of the game in a society,
the model can be considered an institution, and,
subsequently, it can contribute to responding to
the need, stated by Sen (1999) and North (1990;
1994), to have institutions in order to promote
proper development of the regions.
susTAinABlE DEVEloPMEnT
No accurate date can be given to the origin of this
concept, however, it was in 1987, when the World
Commission on Environment and Development,
directed by the Norwegian Prime Minister Gro
Harlem Brundtland, published its report Our
Common Future, that this term came into use
(Selman, 2000). That report suggests that sus-
tainable development is the way of development
that satisfies present needs without compromis-
ing future needs. Moreover, the report stresses
that the sustainable development concept is not
a fixed status of harmony but, on the contrary, a
dynamic process of change in which the exploita-
tion of resources, the destination of investments,
the orientation of technological development
and institutional changes are oriented to satisfy
present and future needs (World Commission on
Environment and Development, 1987). The pre-
viously mentioned Brundtland Commission was
followed by the UN Commission on Environment
and Development at the Rio Meeting (UNCED,
1992), statement Agenda 21 (Helminen, 2000),
and the Global Conference on the Sustainable
Development of Small Island Developing States,
held in Barbados (UN, 1994).
Although the concept of sustainable develop-
ment proposed in the Brundtland report has been
shared by many authors –i.e., Bass and Dalal-
Clayton, (1995) and Naredo, (1998)-, Gladwin et
al., (1995) consider it an unclear and ideologically
controversial concept. Starik and Rands (1995)
maintain that this definition, although been
widely accepted as Naredo (1998) states, is just
251
 Multinational Companies and their Link to the Intellectual Capital of Territories
Figure 1. The Three Domains of Sustainable Development
a normative abstraction full of incongruence. On
the same lines, Giddings et al. (2002) state that
the definition proposed in the Brundtland report
is a political definition which, based on its am-
biguity, aimed to obtain widespread acceptance.
The combination of environment, economy and
society guaranteed a wide debate on sustainable
development. However, the lack of depth of the
concept makes it senseless and not rigorous.
Since it was explained, this definition has been
subject to multiple modifications and has been
reformulated from different points of view, with
major variations (Keiner, 2005). However, and
in spite of the mentioned problems, Giddings et
al. (2002) still use the term “sustainable devel-
opment” because they believe that this way of
observing society-economy-environment related
concepts is commonly accepted. Thus, as Figure 1
shows, the usual representation of the sustainable
development is made through three circles that
represent society, economy and environment in
a balanced way. This balance between the those
three elements does not necessarily have to be
252
like this in all cases. In fact, as Shearlock et al.
(2000) state, the importance of each of the factors
in the achievement of sustainable development
is not clearly defined. Selman (2000) also states
that there are multiple definitions of sustainable
development; all of them include environmen-
tal, social and economic parameters. Similarly,
Shearlock et al. (2000) indicate that policies for
sustainable development require the integration
of three political environments that have been
traditionally separated: the economic, the social
and the environmental. On the same lines, García
Falcón and Medina Muñoz (1999) indicate that,
from the environmental, social and economic
points of view, sustainable development is increas-
ingly seen as a long-term challenge.
Another criticism of the term “sustainable
development” is that it has many meanings, and
a different interpretation depending on who uses
it –i.e., governments, company managers, ecolo-
gists- (Giddings et al., 2002; Selman, 2000). After
their review of the different definitions of the term
“sustainable development”, Gladwin et al. (1995)
Multinational Companies and their Link to the Intellectual Capital of Territories
state that, although the debate about this concept
will go on for years, the concept itself is subject
to the following five restrictions:
• To have a space-temporal vision.
• To have an understanding of the world’s
economic, ecological and social problems
in an interdependent and interconnected
way.
• To have a fair distribution of the resources
among the generations, members of the
same generation and species.
• To be prudent from the technological, sci-
entific and political points of view. It is
necessary to be cautious and modest when
pursuing sustainable development since
the great complexity and dynamism of the
ecological and social systems make reli-
able predictions difficult.
• To avoid dangerous imbalances, in other
words, trying to obtain an objective must
not entail harming or impeding others.
Giddings et al. (2002) think that the prin-
ciples required for sustainable development can
be reduced to: a) consideration of the needs of
future generations, b) social balance between
races, genders, etc.), the people’s participation
of in the design of their own futures and d) the
importance of the biodiversity and integrity of
the ecosystem.
Apart from the balance between the social,
environmental and economic aspects, Haughton
(1999) believes that five principles of equity must
be taken into account in any debate on sustainable
development. That author states that, if these five
principles are not considered individually and
collectively, then the capacity for achieving sus-
tainable development is critically undetermined.
Those principles are: a) intergenerational equity
or the principle of futurity, which aims to build
the present without destroying the future; b) the
intra-generational equity, which seeks social eq-
uity; c) geographical equity, which aims to adopt
local policies in order to solve local and global
environmental issues; d) procedural equity, which
aims to ensure that the participative and legislative
system guarantees open and fair treatment for all
people and finally, e) inter-species equity, which
aims to achieve equal consideration of the survival
of other species and that of humans.
A review of the literature on sustainable devel-
opment reveals two schools of thought, the strong
sustainable, and the weak sustainable (Simon,
2003). In the former, maintenance of natural capital
is sought, and this implies renouncing economic
growth, since the creation of manufactured capital
requires natural capital (Simon, 2003). Therefore,
if economic and demographic growth is not
stopped, automatic adjustments will be made in
order to stop those unsustainable trends (Gold-
smith, 1972; Ehrlich, 1990; Meadows, 1991).
On the other hand, the weak sustainable school
is, according to Simon (2003), more optimistic
since it considers that there can be a substitution
between man-made capital and natural capital, so
development can exist but will not be unlimited.
However, as the Brundtland report highlights, the
limit is not fixed, but related to issues such as the
current status of technology or the existing social
organisation (WCED, 1987). As can be seen in
the design of the proposed model, this work is
undertaken under that last conception of sustain-
able development.
inTEllECTuAl CAPiTAl
oF A TERRiToRY
The theory of intellectual capital, its framework
and its measures were initially developed to be
used from the company perspective (Bontis, 2002;
2004). However, some authors such as Bontis
(2002), Edvinsson and Stenfelt (1999), Malhotra
(2000), Pasher (1999) and Sánchez Medina (2003)
were soon using this theory for territories. In that
respect, Edvinsson (2002) proposes the follow-
ing questions: Where (in which part of a country,
253
 Multinational Companies and their Link to the Intellectual Capital of Territories
region or city) is value being created? Which
knowledge is being created in the nation? What
do the intellectual and knowledge capital maps of
the country look like? What have the main social
innovations been in the last few years? and Who
will be in charge of the creation of intellectual
capital within the territory? In short, we are at
a point where the study of intellectual capital is
not just important for companies, but also must
be undertaken for national and international
economies, especially when they are immersed
in a rapid transition to knowledge-based societ-
ies (Malhotra, 2000). Edvinsson (2002) states
that, if intangible assets are important for private
companies, they are also important for the produc-
tivity and competitiveness of public companies.
Thus, Malhotra (2000) states that the leaders of
the world’s national economies must try to find
reliable tools to measure knowledge resources in
order to understand how those assets are related
to the future actions of their countries.
On that line, Bradley (1997a) defines a coun-
try’s intellectual capital as its capability to trans-
form knowledge and intangible assets into wealth.
In the same way, Malhotra (2000) defines it as
those hidden assets that sustain the growth of the
country and the added value of the stakeholders
that live in it. It is also important to stress that the
value of this kind of capital is represented by the
potential financial returns that are attributable to
the nation’s intangible resources. Furthermore,
Bontis (2002; 2004) and Edvinsson and Stenfelt
(1999) state that a country’s intellectual capital
includes the hidden values that lie in individuals,
companies, institutions, communities and regions
and are, or may be, a source of the creation of
wealth. Moreover, those hidden values are the
roots that provide the territory with the fuel to
face its development and future wellbeing; thus,
this capital is characterised by the long term view
that the territory has. In that respect, intellectual
capital can be perceived as the value of the ideas
generated by the combination of human capital
and structural capital that allow the production
254
and sharing of knowledge and form the basis for
the creation of value and the development of new
wealth structures (Edvinsson & Stenfelt, 1999). In
other words, intellectual capital is the force that
drives nations to create future wealth by providing
the roots that will make it possible to harvest the
results in the future (Amidon, 2001).
Moreover, Bradley (1997b) states that national
governments can influence the intellectual capital
that exists and that is generated. Thus, the existence
of institutions and policies that favour knowl-
edge sharing or recognise intellectual property
contributes to a better development of this kind
of capital. Other factors that affect the growth of
this kind of capital are a flexible labour market,
easy access by the companies to this capital, the
existence of quality technological infrastructures,
educational quality and the culture of the country
(Malhotra, 2000).
Therefore, it seems logical to think that, if
countries are to grow, they must confront the
economy of the intangibles. In this new era, the
wealth of nations is increasingly obtained from
elements of intangible capital, such as knowledge
or global reputation. Therefore, countries that wish
to grow must be strong in those sectors where
intangible assets are paramount (Daley, 2001). On
that line, Stewart (1998) considers that the wealth
of nations is not in their rubber trees or in their
acres of diamond mines but in the processes and
technologies they use to exploit them; that is, in the
intellectual capital. Similarly, Edvinsson (2002)
maintains that the regions that will be wealthier
in the future will be those with knowledge-based
activities. Furthermore, Azua (2000) states that
knowledge has become the vertebral axis of the
differentiation between countries while Nonaka
and Byosiere (1999) indicate that continuous in-
novation and knowledge have become important
sources of the survival and sustainable competitive
advantage of nations.
Intellectual capital represents the most impor-
tant value when facing the competitive challenges
that characterise the knowledge society (Bueno
Multinational Companies and their Link to the Intellectual Capital of Territories
Campos, 1999). In fact, only knowledge offers
nations the opportunity of creating sustainable
wealth. Thus, it will not be surprising that countries
that are theoretically less developed but with a good
position in terms of technological resources may
take a leap forward and find themselves among
the most developed countries (Malhotra, 2000).
Following that idea, Bontis (2002) states, on one
hand, that the unavailability of knowledge to the
undeveloped countries may lead to greater differ-
ences from the most developed nations, and, on
the other hand, that the differences between the
various sectors of a single society can increase
because of the imbalance in the availability of
intellectual capital. In fact, the OECD (2001) states
that, on average, each additional year of education
that a country’s population receives leads, in the
long-term, to an average increase of between 4%
and 7% in per capita income. Thus, education,
which is one of the components of a country’s
intellectual capital, not only offers benefits to its
recipients but also has a positive economic impact
on society as a whole.
However, although intellectual capital has
become a key factor for national economies,
traditional accountancy is still dominated by the
traditional production factors (Malhotra, 2000).
Edvinsson (2002) states that the current obses-
sion with planning, budgeting and accounting
based on tangible indicators will only end up
impoverishing society and devaluing the wealth
of nations mainly because it ignores the contribu-
tion of intangible assets. In that respect, Pasher
(1999) states that traditional economic indicators
are habitually used in analyses of a country’s in-
ternal and external potential. The above begs the
question: Do traditional economic indicators give
a complete and accurate measure of a country’s
resources and a correct evaluation of the potential
for future growth? Pasher (1999) says not, because
to achieve those objectives it is necessary to have
tools that allow a reliable evaluation of the nation’s
intangible assets. Malhotra (2000) states that the
traditional measure of the economic performance
of countries was based on their Gross Domestic
Product and in terms of the traditional production
factors: work, land and capital. In spite of the
increasingly important role of knowledge-based
resources and the performance of countries, many
nations base their evaluation of performance on
traditional production factors. Schneider (1998)
shares that opinion and states that since traditional
accountancy does not reflect the value of intangible
assets, it is not suitable to capture the dynamic
nature of national economies. Moreover, that
author points out that, since these assets are key
factors for the future success of nations, tools that
reflect their value adequately must be established.
A tool of this kind could be useful for national
leaders when taking decisions since it would allow
them to have control of the achieving of national
objectives (Pasher, 1999).
Consequently, and in order to manage a ter-
ritory’s intellectual capital properly, there must
be a measurement system that enables it to be
described by entering it in the accounts and system-
atically monitoring the evolution of that national
intellectual capital (Edvinsson & Stenfelt, 1999).
Edvinsson (2002) argues that the decreasing im-
portance of the tangible assets in comparison with
intangible assets in the development of countries
makes it necessary to have an accounting system
that includes all the non-financial assets linked to
knowledge management, culture and the territory’s
foreign relations. In other words it is necessary to
establish systems that enable accurate measure-
ment of a region’s intangible assets of (Malhotra,
2000) since that will provide leaders with a tool
to facilitate better management of these assets,
which, as has been said throughout this chapter,
increasingly determine the success of national
economies (Bontis, 2002).
PRoPosAl oF A MoDEl
As has been already mentioned, the location of
a multinational in a territory affects both the ter-
255
 Multinational Companies and their Link to the Intellectual Capital of Territories
ritory and the company. Only if the relationship
between the two is properly managed will both
parties benefit. The region’s authorities must
consider not only the economic aspects that may
improve the income of the area and its inhabit-
ants but also other aspects, such as the possible
loss of cultural identity, the immigration resulting
from the company’s need for workers, the pos-
sible environmental impacts of the company’s
activities, etc. In short, they have to reconsider
all those aspects that condition the development
of the territory or have the potential to do so. This
work proposes to provide a tool that is based on
a territory’s intellectual capital and permits the
management of the territory’s development model
and the multinational’s involvement in that devel-
opment. In other words, the aim is to manage, in a
balanced and integrated way, the development of
the territory and the multinational’s involvement
in that development. Consequently, the proposed
model may serve as a “road map” to the achieve-
ment of a sustainable development that clearly
indicates what is expected of the multinational
in that respect. The model also allows an overall
evaluation of the multinational’s direct and indi-
rect impact on society, the environment and the
region’s economy.
It should be stressed that the model aims to be
generic and flexible enough to be adapted to the
particular case of each territory. Thus, a single
organization could consider different assets de-
pending on the regions in which it locates.
Moreover, we should clarify that the aforemen-
tioned relationship will not be the same in all cases.
Figure 2 shows that the territory’s level of risk in its
relationship with a multinational depends mainly on
two multidimensional variables: the intensity of the
impact of the multinational’s operations on the re-
gion and the territory’s sensitivity to those impacts.
Those impacts could be social (i.e., cultural changes,
increased immigration, technological transfer),
environmental (i.e., environmental degradation,
higher water consumption) and, finally, economic
(i.e., higher income, increased competition, greater
256
dynamism of the economy). Obviously, since both
variables are multidimensional, we have a multidi-
mensional matrix that will have as many layers or
dimensions as types of impact of the multinational
on the territory. The more impacts there are placed
in squares 1, 2, 3 and, especially 4 in Figure 2, the
more useful the application of the proposed model
will be. In other words, the model has been well
thought-out and, therefore, will be more useful in
those cases where the location of one or several
multinationals in a territory has a significant influ-
ence on its development.
Thus, the establishment of a multinational that
undertakes a potentially environmentally harmful
activity and that generates much employment in
territories with a low level of economic and social
development will not have the same impact as
the establishment of a similar multinational in a
developed country with good infrastructures.
The objectives that we pursue with the applica-
tion of the proposed tool are the following:
Main objectives:
• To create a map with the most relevant
intangible assets so that the region can
achieve the kind of development it wants,
paying special attention to those related
to the relationship between the multina-
tional and the territory. The aim is to re-
spond to the issues raised by authors such
as Bontis (2002), Edvinsson and Stenfelt
(1999), Malhotra (2000), Pasher (1999)
and Schneider (1998) regarding the need
for territories to have a system for entering
their intangible assets in the accounts.
• To monitor, in an integrated and bal-
anced way, the development of the ter-
ritory and the multinational’s role in that
development.
• To quantify what is understood in the territo-
ry by sustainable development, by means of
a set of intangible assets that reflect its eco-
nomic, social and environmental situation.
Multinational Companies and their Link to the Intellectual Capital of Territories

Figure 2. Risk Matrix of the Relationships between the Multinational Companies and the Territories

• To plan the required type of development
for the territory and to establish the roles
that the different agents participating in
that development (including the multina-
tional company) must play.
Derived objectives:
• To establish the necessary mechanisms to
measure and evaluate the territory’s most
important intangible assets.
• To establish a framework of coexistence
between the multinational company and
the territory. Once the long and short term
objectives to be achieved from the intan-
gible assets of the model are established,
both parties know what is expected of them
and whether the management of those as-
sets is of use in achieving the desired type
of development.
• To promote social dialogue in order to de-
cide which development model is needed
in the territory.
• To promote dialogue between the company
managers and the territory’s authorities.

257
 Multinational Companies and their Link to the Intellectual Capital of Territories
The structure of the model is adapted from
that proposed by Sánchez Medina (2003) for the
evaluation of the sustainability of the develop-
ment of a specific type of territory, islands. Thus,
to establish the categories, we have decided to
distribute the intellectual capital according to its
functionality, in other words, grouped according to
whether they are social environmental, economic,
etc., and not according to the nature of the assets
as is done in the Skandia Navigator for countries
(Edvinsson & Stenfelt, 1999). The reason for this
decision lies in the fact that this way of organising
the model coincides, to a greater extent, with the
typical model for public administration, and this
facilitates the implementation of the model and its
identification with the objectives of the latter.
Thus, as shown in Figure 3, the model is di-
vided into seven dimensions or categories: one
for each of the six types of intellectual capital
identified in this study, and a seventh that shows
the result of accumulating the intangible assets of
the other dimensions. The identified categories
are “economic activity” capital, “society” capital,
“environmental” capital, “public administra-
tion” capital, “multinational company” capital,
“training and development” capital, and “result”
capital. None of these categories should be seen
as an isolated compartment; on the contrary, one
must be aware of the existence of important links
between them, which must be taken into consid-
eration in order to apply optimum management.
Finally, we should mention that each category
may include subcategories; in other words, cat-
egories of intellectual capital can be established
at a second level.
Once the structure of the model is defined,
the relative weight of each proposed category
and subcategory must be established. This weight
represents the importance of each category and
subcategory in achieving the objective of sustain-
able development.
The next step is to determine, for each of the
categories and the subcategories (where they
exist), which intangible assets are interesting to
258
manage and the most appropriate indicators to
measure them. Moreover, those intangible assets
and indicators must be selected on the basis of the
needs, characteristics and circumstances of the
territories and the multinational. Thus, each case
will have its own intangible assets, which may,
or may not, coincide with those of other cases.
The value of each asset will be formed by adding
the weights of its indicators. Similarly, the value
of each subcategory will be obtained by adding
the weights of the assets that it comprises. The
values of the categories will be obtained by the
same means, but in this case, the added values will
those of the subcategories. Of course, if a category
has not been divided, the calculation will be made
in the same way as for the subcategories. Finally,
the value of the result category will be obtained
from the sum of the other categories.
Thus, at the end of the process, not only will
the value of each of the indicators be obtained, but
also an index value for each asset, subcategory and
category. Obviously, this offers great possibilities
to exercise control of the entire development of
the territory since analyses can be conducted at
all the aforementioned levels.
In order to create these aggregate values, we
must establish a base value or reference value for
each indicator. These values may be those obtained
in the first year of measurement or values that
represent the objectives to be achieved. Once this
task is accomplished, the value of each indicator
will be the measurement value divided by the base
value. Thus, the distance of any index or indicator
from 1 must be interpreted as the difference in
status between the measured result and the base
result. Hence, if the result of the index calculated
by this formula is below 1, it means that the situ-
ation has worsened while if it is above than 1, it
would have improved. Obviously, in order to do
this, all the indicators must be designed to mea-
sure the asset in positive numbers. That is, if we
measure the citizens’ awareness regarding saving
water consumption, we could not establish the
indicator as the cubic meters of water consumed
Multinational Companies and their Link to the Intellectual Capital of Territories

per person, but the inverse of that measure. The
way to proceed is as follows: if the indicator is
positive, that is, if a positive value is beneficial to
the territory, the actions to be taken are:
Firstly, a base value is chosen; this could be the
measurement of the indicator for a specific year.
Let us suppose that the percentage of recycled
urban waste is used to measure environmental
awareness and a base value of 50% is obtained.
Then the current measurement of the data must
be taken. The result of that measurement, which
may be 60%, is divided by the base value, giving
a result of 1.2 (60%/50% = 1.2). The fact that the
result is higher indicates a positive evolution; more

Figure 3. Measurement Model for Intellectual Capital in a Territory where a Multinational Company
is Located.

259
 Multinational Companies and their Link to the Intellectual Capital of Territories
specifically, it means that there has been a 20%
improvement on the base value. However, it is not
possible to use indicators with negative values,
such as water consumption. In that case, if one
wishes to use the measure, it must be converted
into a positive value: Thus, it is sufficient to use
1/consumption since high values of this ratio will
be positive for the territory since they involve low
water consumption.
Result Category
As occurs in the Balanced Scorecard (Kaplan &
Norton, 1997) with the financial perspective, we
propose this category as the result of the figures
obtained in the rest of the categories of the model,
thus, if the other proposed capitals are well man-
aged, result capital must increase. Result capital
is conceived as a whole that summarises what
occurs in the other categories. Moreover, and as
we have already mentioned, the objective of this
model is to contribute, by means of intangible asset
management, to the sustainable development of
the territory where the multinational company is
located. Taking into account the fact that variables
such as economic competitiveness, social balance
or the good condition of the environment have
an impact on sustainable development, and that
these assets are also included in other categories,
in this category, we aim to obtain a measure that
is the aggregate of all the intangible assets that
play a part in achieving sustainable development.
In other words, we aim to obtain a measure that
determines the degree of sustainability of the
development that is taking place in the territory:
therefore, as well as including specific assets, it
integrates overall measures of the accomplishment
of the objective for which the model was created.
Two indicators will be used to make that measure-
ment and, through them, we aim to determine the
level of sustainable development in the territory
under study. The first of these indicators must
measure the territory’s wealth –i.e., the Gross
Domestic Product (Pasher, 1999; Bontis, 2002).
260
We must consider that, although the intangible
assets are becoming increasingly important, the
wealth generation process is also conditioned
by the tangible assets of the territory. However,
for there to be sustainable development, mere
economic development is not enough because a
territory can create wealth without respecting the
environment and without social equity. In order
to avoid this problem, and to measure not only
the creation of wealth, but also the sustainability
with which it is created, a second indicator is
introduced. This will be an index that is obtained
as a result of calculating the weighted average of
the indices obtained in each of the other categories
of the model, which, in turn, are also calculated
on the basis of the weighted values of the differ-
ent intangible assets comprising the previously
mentioned categories.
Economic Category
As we have repeatedly mentioned, the economy is
one of the fundamental elements for the achieve-
ment of sustainable development (Helminen,
2000; Shearlock et al., 2000; Springett, 2003).
Sustainable development at a company level has
been called “eco-efficiency”; a term that can be
defined as the process through which the exploi-
tation of resources, destination of investments,
technological orientation and corporate changes
aim to maximize the added value while minimising
the consumption of resources, waste production
and pollution (Helminen, 2000).
Thus, this category includes all the intangible
assets that are essential for the development of
the economic activity of the territory. Obviously,
those that are linked to the relationship between
the multinational company and the region are ex-
cluded but, due to their importance to the region,
they will be placed in a separate dimension.
Moreover, in order to capture the reality of
the intangible assets of this category in a more
accurate way, it would be interesting to divide it
into subcategories. In this work, we propose the
Multinational Companies and their Link to the Intellectual Capital of Territories
following subcategories: a) agriculture, livestock
and fisheries capital, b) industry and construction
capital c) trade and services capital. The first
must include all the intangible assets needed for
the sustainable development of the agricultural,
livestock and fishery activities of the territory.
Similarly, the second and third will include all
the intangible assets needed to achieve sustain-
able development of the economic activities
related to industry and construction, and to trade
and services, respectively. However, a different
division is possible if it leads to a more accurate
reflection of the reality of the territory. This last
comment is applicable to all the categories pro-
posed in this work.
Examples of intangible assets which fall into
this category are the competitiveness, productivity,
image, opening to foreign markets, the accident
rate at work, innovation, quality, etc., of the com-
panies in the sector.
Environmental Category
The relevance of this category is unquestion-
able given the importance of the environment
to the achievement of sustainable development
(Shearlock et al., 2000; Willson & Buller, 2001).
In fact, this category has, on many occasions,
attained greater importance when an attempt to
achieve sustainable development has been made
(Giddings et al., 2002).
Environmental capital includes those intan-
gible resources whose development is determinant
for the environment. This category will include
the intangible assets that are related to issues such
as water, waste, energy and the environment. In
this work, we propose to divide this category into
four subcategories: energy and water, waste and
recycling, rural environment and urban environ-
ment. The first includes the intangible assets that
are related to the production and consumption of
water and energy. In the same way, the second
subcategory includes the non-material assets that
are linked to the generation of waste and to recy-
cling. Finally, the subcategories rural and urban
environments include those intangibles that are
essential for the protection and conservation of
the natural and urban spaces.
Examples of the intellectual capital within this
dimension are environmental health, air quality,
deterioration of the territory, the impact on ob-
taining energy, the degradation of water sources,
concern about the environmental health, etc.
society Category
The dimension called social capital covers all those
intangible assets whose development improves the
territory’s social strength. This category will in-
clude the intangibles linked to areas such as health,
housing, employment, immigration, culture,
sports, women, youth, security, justice, etc.
The importance of this dimension within the
model is clear since it is impossible to conceive
commercial, training or public activities without
considering the social aspects. In fact, as stated
in Gladwin et al. (1995), Gobierno de Canarias
(2002), Selman (2000), Shearlock et al. (2000) or
Willson and Buller (2001), sustainable develop-
ment cannot be understood if it is not accompanied
by efforts to achieve balance and social justice.
Therefore, it is a category that must be captured
by means of certain intangible assets, the level of
equity and social integration in the society of the
territory as a whole.
Furthermore, and due to the great diversity
of aspects linked to the social environment and
in order to make a more structured study, we
have decided to establish seven subcategories:
a) employment capital, which aims to capture
the intangible assets related to work, b) housing
capital, which includes the intangible assets related
to housing in the region, c) the groups under social
protection capital, which includes the intangible
assets linked to the population groups the that
need social help, d) population and immigration
capital, which includes the non-material assets
related to demography, e) public safety capital
261
 Multinational Companies and their Link to the Intellectual Capital of Territories
comprising those intangible assets closely linked
to the guarantee that citizens are not victims of
crime, f) culture and sport capital, which includes
all those non-material assets linked to the cultural
and sport habits of society and g) community
health capital, which is comprises the intangible
assets that are strategic for the population to enjoy
good health and health care.
Some examples of intangible assets of this
category that can be valid for any territory are:
equality between the sexes, the integration of im-
migrants, population density, health education, job
security, the unemployment rate, police efficiency,
sports practice, etc
Finally, we should add that this category must
not be mistaken for the concept “social capital”
as defined by authors such as The World Bank
(2002), Bertucci (2002), Coleman (1998), Hazle-
ton and Kennan (2000) and McElroy (2002) and
others, because they consider that this term is a
reference to those aspects of the social structure
which allow social interactions. Consequently
we must conclude that these two concepts are not
fully equivalent.
Training and Development Category
Bradley, (1997b) states that there are two key fac-
tors for promoting a country’s intellectual capital.
The first is to have a good R+D network, and the
second is to have a good education system. Due
to its importance, we have decided to establish
our own category for this kind of asset. The intan-
gible assets that are vital to training and research
and development in the territory are included in
the training and development category within
this model. As examples of this kind of capital,
we can mention education quality, technological
independence or the applicability of what is re-
searched. Thus, improvements within this block of
capital will have future direct or indirect positive
consequences on the other categories.
As we have already mentioned, the economy
of the territories is increasingly dependent on
262
intangible assets, and therefore it is essential to
join the knowledge-based economy. However, in
order to achieve that, regions must have the raw
material, which, in this case, is knowledge. In
order to acquire this kind of asset, the region must
commit to the training of people and research and
development. Obviously, another way to acquire
this kind of asset is to hire qualified people from
other regions or to buy patents or production
methods. However, those last options, which in
many cases may be faster and cheaper, might have
some disadvantages. The first is that they may cre-
ate technological dependence; the second is that
they can relegate the territory’s inhabitants from
positions that are essential for the development of
the region. This may happen if the multinational
urgently requires qualified staff, and the terri-
tory does not have them. However, in spite of
the possible negative effects, this option can be
used to obtain the capital needed in the short term
and to train new professionals. Of course, in this
aspect, multinationals represent a highly relevant
opportunity for knowledge transfer. Finally, we
should stress that territories wishing to achieve
sustainable development must have a well trained
workforce (Mehmet & Tahiroglu, 2002) and that if
they wish to have well qualified human resources,
there must be good level of education and training
(Armstrong, 2001).
In order to conduct an analytical study, we have
created four subcategories of this kind of capital.
The first comprises the intangible assets related to
primary and secondary education while the second
includes the non-material assets linked to univer-
sity education, science and technology; the third
covers the intangible assets that are determinant
for professional and vocational training; and the
fourth is made up of intangible assets linked to
the information society
Public Administration Category
This block of intellectual capital comprises all
those intangible assets that are critical to correct
Multinational Companies and their Link to the Intellectual Capital of Territories
management by the territory’s public administra-
tion, including the relationship with the multina-
tional and its impacts on the region. We must also
take into account that sometimes the region even
offers public resources (i.e., financial grants, tax
incentives, etc.) for the multinational to locate or
remain in the region. We must not forget that the
public administration must ensure the welfare and
development of the territory. Moreover, what this
category seeks is to capture, by means of intangible
assets, the administration’s capacity to adapt to
the citizens’ needs and their social, environmental
and economic expectations of development. In
that respect, it is necessary to stress that García
Falcón and Medina Muñoz (1999) consider that
the achievement of sustainable development re-
quires the design and implementation of policies
that pursue sustainability in the environmental,
economic and social areas. Finally, and by way of
example, some of the intangible assets included
in this intellectual capital block are: agility in the
resolution of expedients, the adaptation of laws to
social demands, modernity, efficiency, adaptation
to social changes, etc.
Multinational organisation Category
This dimension comprises those intangible assets
that mark the relationship between the multina-
tional company and the sustainable development
of the territory. Thus, this category includes the
multinational’s short and long term commitment
to the territory. Thus, the multinational’s short-,
medium- and long-term commitment to the ter-
ritory manifests itself in this category. Clearly,
compliance does not guarantee the achievement of
the sustainable development in the territory since
the stakeholders are also a conditioning element
in this factor. However, if the objectives proposed
in this dimension are achieved, it is evident that
the multinational has fulfilled its commitments
to the territory.
Four subcategories can be established within
this category. The first, called relationship with
the administration, includes those intangible as-
sets related to the link between the company and
the administration. This dimension will include
aspects such as communication between the two
institutions, the fulfilment of commitments by both
parties (subject to the multinational’s legality and
the implementation of the incentives promised by
the administration). The other three subcategories
are the social, economic and environmental im-
pacts. These include the intangible assets related
to the multinational company’s impacts on the
social, economic and environmental aspects of the
territory. Only the direct impacts are listed since
the indirect ones, if they exist, will be captured by
means of the other dimensions. Examples of assets
which could be included in this category are:
• Employment for the inhabitants of the
region
• The quality of the generated employment
• The percentage of the multinational com-
pany managers that are natives of the
region.
• The multinational’s capacity for creation
of wealth for the territory.
• The multinational’s technological transfer.
• The multinational’s technological transfer
to firms in the region.
• The multinational’s participation in the
education, culture, etc. of the territory’s
inhabitants.
• The multinational’s environmental impact.
• The multinational’s contribution to the
conservation of the environment
• The dependence of the territory on the
multinational company for economic and
technological issues, for employment, etc.
Relationships between the
Different Categories
As mentioned before, there are relationships be-
tween certain assets of the different categories.
We will give some examples of these possible
263
 Multinational Companies and their Link to the Intellectual Capital of Territories
relationships, which are represented by arrows
in Figure 3. Intangible assets from the research
and development dimension, such as the impacts
caused by production of energy, or the degrada-
tion of the aquifers are clearly influenced by the
quality of the relevant research and development,
which is an asset in the university, science and
technology subcategory.
Moreover, if we consider that governments,
through their actions, aim to selectively mitigate
environmental and social issues and to establish eco-
nomic policies that are sustainable from an ecological
point of view (Shrivastava, 1995), it is reasonable to
think that there is a link between public administra-
tion capital and environmental capital.
There is also a two-way relationship between
social capital and environmental capital (Pretty
& Ward, 2001). Factors such as culture or demo-
graphic pressure affect the environment or the
deterioration of the territory, while in the opposite
direction, assets such as water quality or pollution
directly affect assets included in social capital,
e.g., the health of the population.
Other possible relationships are those between
the training and development capital and envi-
ronmental and social capital. There is no doubt
that an academically well-prepared society has
a positive impact on the environment and social
tolerance.
Finally, there is a relationship between assets
of the multinational dimension and the rest of
the assets. As an example, we can mention that
the environmental impact caused by the multi-
national can affect the health of the population
(social category), or that technological transfer
contributes to the strengthening of the company
network of the region, making it more competitive
(economic category).
APPliCATion oF THE MoDEl
First of all, we should mention that the step prior
to the implementation of the tool proposed in
264
this work must ensure the highest commitment
from the top managers of the territory and of the
multinational since, without their support, the vi-
ability of the work will be in doubt. Moreover, it
would be appropriate to involve the stakeholders
who live in the territory, i.e., business associa-
tions, cultural groups, ecological groups, etc. in
the application
The following stages are considered suitable
for the correct implementation of the model:
1. To choose the work team to be responsible
for executing the project. This work team
must mainly comprise staff from the public
administration. Moreover, it is recommend-
able that the team is a multidisciplinary team
with an open and broad view of the reality
of the territory.
2. To choose the experts to take part in the dif-
ferent stages of the Project. This group must
include agents from all social, economic and
environmental groups of the region. Thus, it
is guaranteed that issues will be addressed
from many different points of view and
that all those groups will be involved in the
project. Moreover, agents who are experts
from the multinational company and from
the public administration must be included.
In this stage, the work teams that are going to
take part in the building stage of the model
and in the planning stage will be divided
into areas. The experts will take part in the
project from Stage 3 to Stage 11.
3. To define what is understood by sustainable
development in the territory. The main aim
is to obtain maximum agreement on the
model of sustainable development that the
region must have. Obviously, this is not
easy; however, the stronger the agreement
is, the fewer the problems that will arise
later and the better understood the actions
of the multinational and its impacts will be,
whether they are positive or negative.
Multinational Companies and their Link to the Intellectual Capital of Territories
4. To draw up the risk matrix. This previ-
ously mentioned matrix will give us a first
impression of which assets are going to be
most important in the relationship between
the multinational company and the territory
and of their possible impacts on the region’s
sustainable development.
5. To establish the structure of the model.
Starting with the proposed base model, there
must be some consideration of whether the
established subcategories are appropriate
for the region or whether it is necessary to
make an alternative division that is better
suited to the territory’s characteristics. In
the case of different subcategories being
established, it should be borne in mind that
this decision will restrict the possibility of
making comparisons with other territories.
However, although that limitation means
that no comparisons with other territories
can be made at a subcategory level, they can
be made at a more aggregate level, such as
the category level or at a more fragmented
level, such as the asset level. This must be a
joint work by the managers of the territory
and the technicians who are going to manage
the tool.
6. Once the structure of the model has been
established, we must consider the impor-
tance of each category and, within them, the
importance of each subcategory. Therefore,
we have to consider that, although the
sustainable development includes social,
economic and environmental aspects, those
aspects may be of varying importance. More
specifically, what we aim to do is to quantify
the contributions of the different categories
and subcategories to the development of the
territory.
7. To determine which intangible assets are
the most relevant in each category and sub-
category to achieving the desired model of
sustainable development.
8. To establish the importance of each asset
within the category or subcategory to which it
belongs. It is obvious that, in order to achieve
sustainable development, not all the assets
will have the same importance. Therefore,
the importance of each asset within each
category must be established.
9. To establish the most suitable indicators to
measure the intangible assets defined in the
previous stage. Firstly, it is appropriate to
start from a proposal by the experts, who
would have aimed to establish indicators that
they deem ideal. Secondly, the technicians
who are going to implement the tool should
test the feasibility of achieving the proposed
measures and the cost that they entail. If the
indicators are not viable, the technicians may
recommend possible alternatives, which
should be validated by the experts.
10. To establish the importance of the indica-
tors. If an asset has more than one indicator
assigned, the extent to which the indica-
tors reflect the intangible asset must be
established. This establishes the weight of
each indicator in the value assigned to the
asset.
11. On completion of the previous stages, in
which the tool to be implemented has been
defined, the planning stage begins. In this
stage, the objective values for all the assets
comprising the model will be established.
We should stress that, in this stage, objec-
tives must be established not only for the
short term, but also for the long term. It
is always important to establish that last
kind of objective, but it will be even more
important in cases where the multinational
located in the territory will only remain
there for a certain time, as is the case of
multinationals dedicated to the extraction
of natural resources that will be exhausted
in a determined period. In these cases, the
territory’s objectives must seek to compen-
sate the loss of the multinational company
265
 Multinational Companies and their Link to the Intellectual Capital of Territories
after a certain time with the intangible assets
accumulated in the other categories.
12. To put the methodology into practice. Once
the previous stages are completed, it only
remains to start gathering the measures of
the indicators and calculate the values of the
assets, subcategories and categories.
13. To analyse the results. This stage consists of
a critical analysis of the results obtained and
comparing them with the expected results.
14. To take decisions. This final step entails, if
necessary, the adoption of measures that,
in light of the results of the previous stage,
enable us to resolve the negative deviations
and to strengthen the positive ones.
ConClusions
The importance of intangible assets in organisa-
tions has increased in recent years; however, that
fact is not exclusive to the companies’ environment
since it also affects territories, which makes intan-
gible assets essential for the future development of
the regions. Thus, regions are interested in achiev-
ing sustainable development and understand that
concept as the way of development that satisfies
present needs without compromising future needs
(WCED, 1987).
Moreover, the location of a multinational com-
pany in a territory generates a series of positive
and negative impacts on the territory. With the
model proposed in this work, we have aimed to
provide multinational companies and territories
with a tool that serves as a map for them, so that
they can achieve a mutually beneficial relationship.
By means of a selected set of intangible assets,
the sustainable development of the territory can
be planned and controlled, and the roles to be
played by the multinational and the administration
can be defined. In that respect, we should stress
that the implementation of the proposed tool will
constitute a step forward in the multinational’s
social responsibility. This is because, by means
266
of this tool, multinational companies will be en-
couraged not only to contribute to the sustainable
development of the territory but also to do so in
such a way that the cited activities are agreed by
the territory and coordinated with the actions that
the territory itself has planned. In addition, the
tool allows short and long term planning and any
possible deviations to be controlled.
Therefore, the main contribution of this work
is the proposal of a model for the management
of the intangible assets which contribute, or may
contribute, to the achievement of sustainable
development in a territory with one or more mul-
tinationals located within its borders and that is
highly sensitive to the impacts caused by them.
Moreover, the model includes the management
of the relationship between the multinational and
the territory, and allows an integral evaluation
of the multinational’s impact on the economy,
society and the environment of the region. The
practical implications of this work are mainly for
the managers of the public administrations of the
territories and for the managers of the multina-
tional companies, who, with this tool, have a clear,
user-friendly methodology for managing sustain-
able development of the territory and the way in
which the multinational company contributes to
that development.
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 271

Chapter 16
International New Ventures,
Organization Structure,
and IC Management
Irene M. Herremans
University of Calgary, Canada

Robert G. Isaac
University of Calgary, Canada

ABsTRACT
Flare Solutions Limited is an entrepreneurial international new venture (INV). Of particular interest is
the manner in which the firm developed a strategy by combining a special set of resources to provide
knowledge products to markets in various countries. The firm realized early on that its knowledge, sys-
tems, and relationships were to be the keys to its success. With this in mind, the founding partners took
steps to ensure that the firm’s structure and controls were conducive to management of its intellectual
capital (IC). The chapter discusses the formation of the INV and the management of its IC in special
ways to sustain its entrepreneurial activity. In part, this involved creating management processes con-
sistent with its objective of creativity and innovation for the broad purpose of knowledge development.
Consequently, the firm has been able to mobilize its IC to sustain its competitive edge in providing
knowledge services.

inTRoDuCTion to SMEs. Until the early 1990s, most multinational

Early research regarding multinational enterprises
generally ignored most small- and medium-sized
enterprises (SMEs), believing that they rarely at-
tempted to internationalize their operations beyond
exporting. This line of research assumed that firms
wishing to operate in foreign countries require large
commitments of resources, generally unavailable
DOI: 10.4018/978-1-60566-679-2.ch016
enterprise (MNE) research was based on the stage
theory, suggesting that an enterprise begins opera-
tions in domestic markets and once settled there,
then progresses to exporting to similar countries. The
next stage might be exporting to dissimilar countries
or setting up a marketing office in a similar country.
The enterprise moves slowly in stages, gradually
committing resources in foreign operations, then
ultimately becomes a mature MNE in multiple
countries with a large and visible presence. Coun-

Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
 International New Ventures, Organization Structure, and IC Management
tries compete heavily to make foreign investment
attractive to the tangible resource-heavy MNEs.
Incentives offered to MNEs by governments often
include among others, tax holidays, favorable
environmental regulations, lax labor standards,
and attractive locations.
The original concept of the large and mature
MNE, with its subsidiaries or franchises visible in
a multitude of countries, still exists (e.g. General
Motors, General Electric, Royal Dutch Shell, and
Pizza Hut). However, due to electronic forms of
communication, the rise in the service and infor-
mation economy, and the growth of e-commerce,
the barriers to internationalizing operations are
now disappearing. These characteristics allow
more SMEs to reap the benefits of operating in
a variety of different countries without heavy
commitments of tangible resources. The Internet
has blurred borderlines, changing the way we
conceive MNEs. And the movement to a heavier
reliance on knowledge as a wealth creating ac-
tivity allows many SMEs to cross borders with
little trace and less controversy associated with
traditional multinational enterprises. Compared
to traditional MNEs, international SMEs have
less political, economic, and social impact but
add value in their own special manner.
A new wave of studies in the business literature
recognizes that many SMEs also operate interna-
tionally without large commitments of resources;
however, little is known about international new
ventures (INVs) (Zahra, 2005), global small firms
(Prasad, 1999), or micromultinationals (Ibeh,
Johnson, Dimitratos, and Slow, 2004; Dimitra-
tos, Johnson, Slow, and Young, 2003). In their
seminal paper on INVs, Oviatt and McDougall
(1994) pointed out that owning resources does
not necessarily define MNEs; rather their actions
should be more indicative of such classification.
Oviatt and McDougall (2005) defined an INV
as “a business organization that, from inception,
seeks to derive significant competitive advantage
from the use of resources and sale of outputs in
multiple countries” (p. 31) with the distinguish-
272
ing feature being that it starts with a proactive
international strategy rather than evolving in
stages. Using entrepreneurial theory to explain
the emergence of INVs, DiGregorio, Musteen,
and Thomas (2008) suggested that INVs come
into existence when either of two opportunities
arises: 1) to leverage internationally resources that
are based domestically, and 2) to exploit resources
internationally that are located internationally. The
authors suggested that an entrepreneur has the
ability to combine resources or markets in novel
ways to provide a product or service. This sugges-
tion is rooted in the Schumpeterian and Austrian
perspective of entrepreneur activity,
Based on the work of Venkataraman (1997),
Shane and Venkataraman (2000) defined scholarly
investigations of entrepreneurship as the “study of
sources of opportunities, the processes of discov-
ery, evaluation, and exploitation of opportunities,
and the set of individuals who discover, evaluate,
and exploit them” (p. 172). To extend this defini-
tion to the international arena, DiGregorio et al.
(2008) suggested that opportunities can exist for
either unique resource combinations (by combin-
ing resources distributed internationally) and/or
unique market combinations (by finding special
markets internationally). In an age of knowledge
assets, combining resources internationally may
mean pooling specific capabilities, knowledge,
and skills held by individuals located in different
countries, and distributing resources internation-
ally may mean using technology to deliver or
market products in different countries. Organiza-
tions recognize these conditions and exploit them,
thereby creating an INV.
In a comparison of a sample of publicly-owned
domestic and international new ventures, McDou-
gall, Oviatt, and Shrader (2003) found certain
variables to be significantly different in these two
types of ventures. INVs had higher levels of the
following variables:
1. International work experience;
2. Industry experience;
International New Ventures, Organization Structure, and IC Management
3. Aggressiveness (measured by entry order
into the industry, market share objectives,
and growth objectives);
4. Differentiation strategies (product innova-
tion, quality, service and marketing);
5. Channels of distribution; and
6. Presence in industries characterized by a
high degree of global integration.
McDougall et al.’s (2003) work answers an
important question: What characteristics do INVs
possess? Zahra (2005) presented an equally im-
portant question: How do INVs “create value by
developing and protecting their unique intangible
assets, especially those that enhance their entrepre-
neurial activities in foreign markets?” (p. 21).
In this chapter, we address both questions by
presenting a case study of a special INV. Initially,
we discuss the situational context that motivated
Flare Solutions Limited, our case study firm, to
form an INV. In so doing, we integrate the literature
and discuss how the management of knowledge,
processes, and relationship resources helped the
INV to sustain competitive edge. Furthermore, this
led the organization to become recognized as one
of the leading international consulting companies
in the oil and gas industry.
In the next section, using our case study, we
will show how Flare meets the definition of an
INV as defined by McDougall et al. (2003). We
then discuss how the company developed as an
economically sustainable INV by developing and
managing its intellectual capital in an exceptional
manner.
BACKGRounD
Flare Solutions Limited was incorporated in 1998
and at that time was known as Flare Consultants.
The firm has been in existence for almost a decade.
It started out with a global strategy, receiving
revenues in a variety of different currencies in its
first year of operations. The global customer base
has expanded, including companies primarily in
oil and gas, such as Petro-Canada, BP (Norway),
Gaz de France, Danske Oil and Natural Gas, Shell
International E&P, IBM, and Wood Mackenzie
(Deutsche Bank) to name just a few.
All five partners of Flare Solutions had prior
international experience in a number of industries
through their employment with IBM and various
oil and gas companies. Recognizing a niche in the
oil and gas industry and feeling some constraints
to their creative and innovative tendencies, the
partners formed their own consulting firm. The
mission of Flare is to provide consulting services
related to information management, as well as
other services and software products, for the
energy business (oil, gas, pipelines, associated
suppliers, and regulators). Flare’s major expertise
is in the area of information systems development
which aligns technical expertise with strategy
decisions in exploration of oil and natural gas.
In other words, Flare provides executives with
information necessary to fulfill their business
strategy in areas such as geosciences, economics,
engineering, etc.
As mentioned, Flare’s start-up was global in
nature. Although the holding company is head-
quartered in the United Kingdom (UK), it operates
as a virtual organization with only a server that
connects the five partners. The Flare organiza-
tion in the UK employs four of the five partners.
The fifth partner is employed by a separate Flare
company incorporated in Canada.
All five partners develop Flare’s strategy and
its major knowledge products. However, the
firm’s operations are project driven, with each
of the partners assigned to projects depending on
the capabilities needed. The project manager also
hires the necessary associates in the United States,
Europe, South America, and elsewhere, depending
on the nature and the location of the project.
Another characteristic of INVs identified by
McDougall et al. (2003) is involvement in in-
dustries which are globally integrated. Roth and
Morrison (1990) identified global integration as
273
 International New Ventures, Organization Structure, and IC Management
characterized by intense competition domestically
and internationally, with competitors having a
presence in all key markets. The products marketed
by these companies are standardized worldwide
as customer needs are also standardized. There-
fore, worldwide operations provide economies of
scale. But, the crux of the issue is how do these
characteristics fit the oil and gas industry?
McNee (1958) describes oil as a flow product,
continuously in demand, inherently international,
and worldwide in character. Because of the dif-
ficulty of storing the product in large quantities,
the functions in the industry are integrated to
reap efficiencies and avoid waste (McNee, 1958).
Therefore, we classify Flare as working primar-
ily in an industry that is characterized by high
global integration, one in which Flare’s products
can also be standardized worldwide, without a
need to customize characteristics based on local
customs and tastes.
Regarding differentiation strategies of product
innovation, quality, service, and marketing (Mc-
Dougall et al. 2003), Flare has stated that it is open
and transparent with its clients, readily sharing
its innovative ideas. The philosophy of the firm
is that a knowledge-sharing policy motivates the
partners to continue to “invent” innovative prod-
ucts and stay one step ahead of their clients. This
policy resulted in a two-way sharing policy. By
sharing ideas with clients, clients will also share
information that helps Flare to refine ideas into
useful products. This knowledge sharing technique
is part of the reason that both Flare and Royal
Dutch Shell received the best Knowledge Man-
agement Project Award by the BCS IM Awards in
2006. The award represents the highest recogni-
tion of innovative excellence in the management
information field within Europe and it is a great
honor. The E&P Catalog™, which was the product
responsible for the award, represents only one of
many systems and processes developed by Flare
Solutions that are innovative. As well, most of
Flare’s new clients are the result of its reputation
and word-of-mouth marketing.
274
Flare operates in a non-traditional manner.
The firm’s method of entry is unusual in that it is
a virtual corporation, with no physical building,
other than each partner’s office in the respec-
tive country. Hiring, marketing, management of
projects, and interaction with the clients are done
primarily through electronic means (i.e. phone
calls, Internet, etc.). However, partners meet with
clients face-to-face when necessary. In addition,
they periodically meet two to three times each
year for planning purposes.
Flare is characterized by developing new, in-
novative products that meet clients’ information
needs. Although initially concerned if their clients
were willing to accept a firm that operates with
little physical presence, the partners discovered
that this method of operation is quite appealing
to most clients, who are willing to learn how they
too can incorporate some of Flare’s techniques in
their own operations.
To summarize, DiGregorio et al. (2008) sug-
gested that opportunities can exist for unique
resource combinations by combining resources
distributed internationally. They also suggested an
alternative strategy of unique market combinations
by finding special markets internationally. To use
Flare as an example, Flare has combined special
knowledge, relationships, and processes to take
advantage of these assets located in a variety of
global locations. By hiring associates in specific
projects locations or with specific expertise needed
to complete a project, the firm has been success-
ful in finding special markets around the world
in an industry that is highly integrated. Because
its client corporations have similar information
systems needs regardless of their location, there
is little need to customize products.
Starting in the year 2000, the authors work-
ing with the Flare partners, embarked upon a
journey relating to the identification and valu-
ation of Flare’s intellectual capital (IC) assets.
The partners knew that the only important assets
that the company possesses are of an intangible
nature, and they desired to identify, classify, and
International New Ventures, Organization Structure, and IC Management
eventually be able to affix monetary values to
them. Over time and with collaboration between
the authors and the partners, these goals were
eventually accomplished as will be shown later
in this chapter.
THE CHAllEnGE oF MAnAGinG
inTAnGiBlE AssETs
Why INVs exist and how do they differ from do-
mestic start ups are important research questions.
However, Zahra (2005) suggested that we must
also investigate beyond start-up to determine how
INVs achieve economic sustainability. Zahra asks:
How do INVs “create value by developing and
protecting their unique intangible assets, especially
those that enhance their entrepreneurial activities
in foreign markets?” (Zahra, 2005, p. 21) In this
section, we address this important question.
Essentially, when the major assets possessed
by the firm are the expertise and knowledge,
knowledge capturing and sharing at several levels
is crucial for the success of this organization. For
Flare, the capturing and sharing of knowledge and
expertise includes the following: 1) among the
partners; 2) between the partners and their clients,
and 3) among the partners and their associates.
In the next section, the theoretical basis for
a number of organizational characteristics is
discussed along with examples of how these
characteristics exist in the Flare organization.
soluTions
Intellectual capital (IC) has been defined by
Stewart (1997, p. xx) as “intellectual material,
knowledge, information, intellectual property,
and experience—that can create wealth” for an
organization. Generally, IC is described as hav-
ing three categories: knowledge, processes, and
relationships. To create IC within an organization,
certain conditions must be present.
Herremans and Isaac (2007) in an empirical
study identified several variables important for
the management and development of IC within
organizations. These variables include the type
of structure a firm possesses, levels of interaction
among employees, and the extent to which em-
ployees trust one another. Essentially, an organic
structure rather than a mechanistic one favors
the development of IC. We discuss how Flare’s
organic structure enables high levels of interac-
tion and trust among the partners. Finally, given
these characteristics Flare was able to develop a
method for identifying, classifying, and affixing
monetary value to IC.
structure and Controls:
organic vs. Mechanistic
Certain types of organizational activities are more
easily accomplished if the structure of the organi-
zation is conducive to the outcomes desired. Two
terms, “mechanistic” and “organic” have been
used to describe the characteristics of internal
organizational environments (Burnes & Stalker,
1961). Mechanistic structures describe highly
centralized organizations with formal operating
policies, procedures, and processes. There are
clear lines of reporting and responsibilities that are
generally documented, in part, in an organizational
chart. In contrast, organic environments describe
decentralized organizations with informal and
flexible structures, capable of adapting quickly to
changing environmental conditions. Mechanistic
structures emphasize vertical communication
lines, whereas organic structures emphasize lateral
communication and participatory decision making
authority. Authority in mechanistic organizations
is often based on seniority, whereas authority
in organic organizations is based on expertise.
Mechanistic structures are more appropriate in
static environments, and organic structures are
more appropriate in dynamic external environ-
ments (Burns & Stalker, 1961). Robbins (1990)
characterized organic environments as having
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 International New Ventures, Organization Structure, and IC Management
flexible task definition, lateral communication,
low formalization, expertise as influence, and
diverse control.
Variation, flexibility, and renewal motivate
the innovation necessary for knowledge genera-
tion (Bennett & Gabriel, 1999, p. 220). Organic
structures support the development of knowledge,
rather than mechanistic structures, as they contain
such elements (Hong, 1999; Ferguson-Amores,
García-Rodríguez, & Ruiz-Navarro, 2005; Shiv-
ers-Blackwell, 2006; Bennett & Gabriel 1999).
One of the reasons for organic structures is to
develop creativity to ensure that the organization
is continuously in a state of renewal (Chakrabarti,
1974; Jin, Drozdenko, & Bassett, 2007; Spender,
2006; Ståhle & Hong, 2002). Creativity as defined
by Amabile, Barasade, Mueller, and Staw (2005,
p. 368) is “the production of novel, useful ideas
or problem solutions.” Glynn (1996) suggests that
organic structures provide an opportunity for more
flexible and innovative capabilities. In contrast,
bureaucracies as in mechanistic structures in-
hibit innovation (Bennett & Gabriel, 1999; Hoffi-
Hofstetter, & Mannheim, 1999; Kwaśniewska &
Neçka, 2004).
Organic environments are inconsistent with
high level of formal controls, such as policies,
procedures, and rules. On the contrary, organic
environments are consistent with a high level
of informal control, such as trust, leadership,
integrity, and similar values. As well, organic
environments with more informal controls tend
to develop generative thinking on the status quo,
rather than adaptive thinking which is more suit-
able for mechanistic environments.
All companies have both organic and mecha-
nistic structures and control. However, creating
mechanistic controls for activities that are more
conducive to organic controls can inhibit renewal
and creativity, thus preventing exploitation of a
company’s IC stocks. Flare has incorporated both
mechanistic and organic controls where each is
appropriate. The type of control and how it helps to
develop and manage IC will be discussed next.
276
Organic
Operating as a virtual company makes Flare a
very organic structure overall. Essentially, the
firm has three types of employees: partners, as-
sociates (hired based on the needs of a project),
and permanent employees who are supervised
by the partners. Compensation for the partners,
based on the annual profits, is divided equally
among the partners with the assumption that each
contributed equally. The associates are supervised
by the partners, but who is supervising and who
is assigned to a particular project depends on the
needs and location of specific projects. Conse-
quently, the partners assign themselves to specific
projects based on the expertise needed. These
characteristics are indicative of an organic struc-
ture as defined by Robbins (1990): flexible task
definition, lateral communication, low formaliza-
tion, expertise as influence, and diverse control.
Regarding IC development and management, this
organic structure provides Flare Solutions with a
number of advantages over traditional business
structures that possess a more mechanistic nature.
Operating organically provides the partners with
the flexibility necessary to provide fast turn-
around time for clients. Because the partners are
linked electronically and have complete access
to the company databases, wherever they may
be individually located, they enjoy high levels of
flexibility and can operate anywhere in the world
and at anytime.
Due to their virtual nature:
• Discussions can occur through the use of
e-mail outside of real time due to time zone
differences in relation to where the differ-
ent partners live or the countries in which
they happen to be working.
• Individual partners working on a project
can minimize interruptions due to the vir-
tual nature of the business. They can work
for ten or more hours in isolation and not
be interrupted, unlike a typical worker in a
International New Ventures, Organization Structure, and IC Management
more traditional office situation.
• A partner becoming fatigued can electroni-
cally communicate with another partner
living in a different time zone to continue
working non-stop on the project, thus re-
ducing turnaround time and increasing
customer satisfaction.
• There is a large reduction in overhead costs,
as well as administrative work, leading to
greater efficiency in operations.
Low formalization and diverse control also
allow the firm to benefit from the client’s ideas.
Replacing a formal control (such as protection of
ideas with copyrights) with an informal control of
trust and interactivity, the partners freely provide
a client access to relevant parts of the database so
as to actively involve the latter in various projects.
The partners believe that their thinking will always
be slightly ahead of their clients; consequently,
Flare is relatively open with the information it is
willing to provide clients. The benefit to Flare
of this openness is the valuable insight into the
client’s expertise on the project.
Through flexibility in structure, informal
control, and generative thinking, the partners find
it easier to emphasize the “why” rather than the
“how” when it comes to doing things both among
themselves and with their clients. Flare believes
that the “how” of getting things done is relatively
easy, but it’s the “why” that it is critical to achieve
agreement among the parties, and to generate new
ideas and question current practices.
Mechanistic
While Flare depends fundamentally upon its
organic nature, the company, through necessity,
must have some mechanistic elements built into
its structure. Flare has devised some mechanistic
structures that allow the partners to create an appro-
priate context for creativity. Research has shown
that certain culture and climate characteristics
will lead to the development and management of
IC. For example, a culture that encourages col-
lectivism, a willingness to deal with some degree
of uncertainty, and low power distance is condu-
cive to development of IC (Nazari, Herremans,
Isaac, Manassian, and Kline, in press). As well, a
climate that encourages trust, risk-taking, open-
ness, and ownership of ideas is also supportive
of creating IC inventories (Nazari et al. in press)
All of these characteristics are usually easier to
generate from an organic environment, compared
to a mechanistic environment. Knowing this, the
partners take special efforts to ensure that Flare
creates a context within which creativity and in-
novation can grow.
Prior to the formation of the INV, the partners
clearly voiced their values, personal mission,
and personal objectives. Consequently, the firm
could determine whether the partnership could
work as a virtual organization. Although values,
missions, and objectives are organic informal
controls, after formation, the company prepared
a formal policy that requires the partners to meet
face-to-face, along with selected associates, on a
reasonably frequent basis to discuss new ideas,
address issues, and resolve problems. Included
in these meetings are social activities for the
partners to get to better know and understand
each other. Then, when they are at distance, they
feel comfortable presenting what might initially
appear to be “wacky” ideas.
Of course, in between these face-to-face meet-
ings, where much business must be carried out,
conference telephone calls are made when neces-
sary. The partners have a mechanistic control that
requires the partner who calls the meeting to ensure
that all of the necessary documents are sent ahead
of the meeting time. In this way, everyone can be
prepared to discuss the items on the agenda, leav-
ing additional time for creative activities.
Evidence that the firm is successful in devel-
oping creative and new ideas is demonstrated
by some of their systems and processes. For
example, their award-winning E&P Catalog™
constitutes an innovative and holistic approach
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 International New Ventures, Organization Structure, and IC Management
to managing information. It permits employees
to locate relevant information in a timely man-
ner by bringing together various organizational
information sources through a user interface that
is intuitive in nature. Essentially, the E&P Cata-
log™ permits access to all data storage sites and
integrates data, knowledge and information with
processes, applications and people-related infor-
mation to provide a complete picture for the user.
For example, a well site, which operates for 20
years, likely was initiated with technology very
different from what is available today. Also, the
geologist who was instrumental in determining
future reserves may not still be employed by the
company. The E&P Catalog helps Flare’s clients
store individual human knowledge within the
confines of the organization. In this manner, this
valuable knowledge does not leave the organiza-
tion when the employee does. The system provides
a knowledge history for each well site, project,
or facility. The E&P Catalog™ represents only
one of many systems and processes developed
by Flare Solutions.
interactivity
Cognitive diversity can be defined as “generat[ing]
multiple perspectives, engender[ing] well thought-
out alternatives, and ultimately lead[ing] to better
decisions” (Olson, Parayitam, and Bao, 2007, p.
200). Cognitive diversity is essential to develop
creative new products that are outcomes of the
organization’s IC inventories. However, avenues
to the development of cognitive diversity must also
be available. Cognitive diversity can be developed
through interactive behaviors (Isaac, Herremans &
Kline, in press). Interactivity among colleagues is
defined as a willingness to challenge one another,
leading to further refinement and sophistication
of a creative idea. Interactive behaviors lead to
the willingness to attempt to understand others’
perspectives and suggest alternatives even if they
could lead to conflict. An organic structure and
controls set the stage for the partners and associ-
278
ates to engage in interactive behaviors.
One example of this interactivity among the
Flare partners, leading to cognitive diversity, is the
manner in which they brainstorm virtually. The
virtual nature of the business has itself brought
an advantage in relation to promoting creativity.
In a traditional office brainstorming session, an
employee might come up with an idea and another
employee might immediately criticize it. The point
is that the idea does not get recorded anywhere nor
is it subject to modifications which might turn it
into a feasible product. Interestingly, although an
overall organic environment will lay the ground
for cognitive diversity, Flare Solutions devised a
mechanistic control that requires partners to keep
e-mail files of messages containing creative ideas,
no matter how infeasible they might appear at first.
This requires the partners to think about these
ideas more thoroughly and not respond to them
immediately (whether they think they are good
ideas or not). After a period of gestation, another
partner might e-mail back and suggest a slight
modification to an original idea, causing a third
partner to enter the discussion and suggest another
change. Over time, the original idea evolves,
and even though it may bear little resemblance
to the one first proposed, it may eventually lead
to a saleable product. Through iterations and an
audit trail of the partners’ thoughts, the final idea
is now robust and highly creative due to the input
of the partners, and it was not lost as might have
happened in a traditional meeting. Thus, cognitive
diversity has resulted through interactivity.
Trust
Based on the work of Mayer, Davis, and Schoor-
man (1995) and McEvily, Peronne, and Zaheer
(2003) trust has been conceptualized as an expec-
tation, which is perceptual or attitudinal, [and]
as a willingness to be vulnerable, reflecting a
degree of risk-taking. Jin, Drozdenko, and Bassett
(2007) determined that building trust is easier in
an organic rather than a mechanistic structural
International New Ventures, Organization Structure, and IC Management
environment. An organic environment, which
implies employee freedom and the granting of
freedom, must be accompanied by significant
levels of trust that employees will fulfill their
responsibilities. Trust is essential for building the
relationships, which are prevalent in IC processes
(Mayer et al. 1995).
The Flare partners have voiced separately
and without prompting that the most important
characteristic motivating their success is the trust
that they have in each other. Operating virtually
makes it impossible to “check on one another” to
determine if each is contributing his fair share.
As each partner is working on projects in various
parts of the world, they simply have to trust that
each is working the number of hours required
to complete projects. Consistent with a trusting
context, Flare has created a no blame culture, and
the team members strongly support one another
when developing and testing new ideas. Flare will
quickly abandon or modify a process when it is
not achieving company’s and/or client’s goals.
intellectual Capital (iC)
By managing IC, Flare has put structure to a very
ambiguous concept. One might say that Flare
created mechanistic structures to manage a very
organic concept. We now describe both the creating
of an IC inventory and the placing of a monetary
value on certain IC elements by tracing their use
to the cash flow from various projects.
The partners wished to develop more insight
into their own intangible assets as IC constitutes
the lifeblood of the company. Therefore, Flare
identified and measured IC in 2000. The technique
used is called the Intellectual Capital Realization
Process (ICRP) (Herremans & Isaac, 2004). The
ICRP seeks to identify specific company know-
how, relationships and processes which result in
the creation of corporate wealth, thus creating an
inventory of IC specific to the firm. The ICRP dif-
fers significantly from other systems that attempt
to measure IC because it identifies specific IC
elements (ICEs) rather than the inputs or outcomes
relating to intellectual capital management. For
example, other IC measurement systems attempt
to determine an organization’s IC by using proxies,
such as customer satisfaction levels or employee
retention levels, whereas the partners wanted to
identify the know-how, processes, and relation-
ships that lead to such outcomes.
Initially, the partners attended a company
virtual workshop to understand better what con-
stitutes IC and ICEs (sub-components of IC). ICEs
are specific elements of knowledge, organizational
processes, and relationships that create wealth
for the company. They are not what a company
possesses but rather what it does with what it has
to create wealth. Each partner was requested to
identify at least 20 ICEs. After the workshop and
without talking to the other partners, the partners
sent their lists to the authors for refinement, elimi-
nating any duplication.
The above procedure resulted in the identifica-
tion of 127 ICEs. Generally IC is thought to be
categorized in three ways - human, process, and
relational capital. However, by identifying sub-cat-
egories of ICEs under these traditional categories,
the ICEs fell into 11 categories. Some examples
of such categories include technical knowledge,
marketing, team psychological processes, team
dynamic/culture, and concept formulation.
As 127 different ICEs are too many to manage
at one time, the partners rated each ICE on three
separate Likert five-point scales. This procedure
helped to identify the ICEs most critical for the
firm. The first scale related to each partner’s
Level Of Knowledge (LOK) regarding each
ICE. Then, each partner rated each ICE on the
basis of its Value-Added (VA) aspect. For this
scale, the partners were asked to consider how
important the ICE was to getting a job done, as
well as to the entire organization. Finally, each
partner rated each ICE on the basis of the Need
To Share More (NTSM) among the partners and
also other stakeholders. The first two measures
(LOK and VA) relate to the present time, but the
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 International New Ventures, Organization Structure, and IC Management

Table 1. Classification of the Intellectual Capital Elements (ICEs)

Level of Knowledge
Low High
Need to Share Low Quadrant A Quadrant B
More Characteristic: Knowledge level low and no Characteristic: Knowledge level high, but
desire to learn more. (vulnerable to organiza- no need to learn more.
tion memory loss) Strategy: Maintain the status quo by training
Strategy: document, train others, develop and mentoring new employees.
systems to capture.
High Quadrant C Quadrant D
Characteristic: Knowledge level low but a Characteristic: Knowledge level is high and
desire to learn more a desire to learn more.
Strategy: Knowledge sharing through men- Strategy: Brainstorming and creativity
toring, discussion groups, and experts sessions
Adapted, with permission, from Herremans & Isaac (2004).

last measure (NTSM) relates to the future. Those
ICEs that were rated with low value added by the
partners were not given further consideration.
This procedure reduced the number of ICEs to
74, all high value-added in nature. The remaining
ICEs were placed in a matrix (please see Table
1), resulting in four quadrants, based on low or
high LOK and low or high NTSM (Herremans
& Isaac, 2004).
Each quadrant suggests a different strategy in
terms of ICE management. For example, Quad-
rant A suggests that these items are vulnerable
to organizational memory loss. In essence, these
high value-added ICEs are very well known by
at least one partner, but not by the other ones, and
there is little desire to learn more by the latter (low
NTSM ratings). Thus, the organization needs to
capture this know-how in the event that the part-
ner leaves the organization. Some techniques for
avoiding loss of such ICEs could involve writing
things down, training other people, and develop-
ing systems/processes that capture the ICEs. For
Quadrant B, there is a high level of knowledge
and little desire to learn more so the appropriate
strategy is to maintain the status quo by training
and mentoring new employees. For Quadrant
C, the level of knowledge is low, but there is a
strong desire to learn more. This involves learn-
ing through knowledge sharing, perhaps through
mentoring, discussion groups, and experts to
share their knowledge. In Quadrant D, the level
of knowledge is high and so is the desire to share.
Here the emphasis is placed on the creation of
sophisticated levels of common knowledge. Some
strategies for ICEs falling in this category might
be the brainstorming, creativity sessions, and other
tactics (Herremans and Isaac, 2004).
In summary, the authors and the partners of
Flare concluded that the company benefited from
the ICRP report (Herremans and Isaac, 2004) in
ten different ways:
1. The ICEs for the organization were con-
cretely identified.
2. The ICEs were classified into conceptually
natural categories.
3. The bearers and non-bearers of ICEs were
identified.
4. The partners now had a sense of the com-
pany’s vulnerability should a partner leave
(i.e. who possesses Quadrant A ICEs).
5. The value-added levels of specific ICEs were
determined to enable decision making as to
which ICEs merited further developmental
attention.
6. The partners now knew which ICEs needed
to be shared.

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International New Ventures, Organization Structure, and IC Management
7. ICEs could now be monitored over time to
determine if the development strategies were
effective.
8. Differentiated strategies could now be de-
veloped depending upon which ICEs fell
into which quadrants.
9. The partners now had a realistic sense of
the potential to create wealth resulting from
their high value-added ICEs.
10. The partners gained peace of mind knowing
Flare had identified and could now manage
its ICEs and that Flare could communicate
and share some of these ICEs with clients.
After completing this initial activity, the part-
ners soon realized that the ICEs could be sorted
and classified in a rather specific manner. Labeling
the ICEs as generator, facilitator, and capacity
helped the partners to understand the ICEs role
in bringing revenues into the organization (Her-
remans & Isaac, 2004). Generator ICEs directly
generate cash flows from client projects and may
be thought of as being similar to labor and raw
materials in manufacturing products. The E&P
Catalog™ discussed earlier is an example of a
generator ICE. Facilitator ICEs are indirectly
associated with client projects in that they support
generator ICEs. In a manufacturing company, such
ICEs are analogous to factory overhead and costs
of producing the product. Examples of such ICEs
include databases maintained by the company, and
logging client project progress. Capacity ICEs
are not readily traceable to client projects, but
they must exist for the company to operate. They
provide the capacity of the organization to operate
and are similar to operational expenses or general
overhead in companies, such as administrative,
selling and general expenses. Some specific
examples would include the company structure,
image, and organizational logo.
Next, the Flare partners wished to affix real
dollar values to their ICEs. To accomplish this
task, the partners selected generator and a few
facilitator ICEs from their inventory (42 in total)
to trace their project invoices on a monthly and
quarterly basis. Each partner indicated for each
ICE whether it was used to secure or complete
the contract. Additionally, they rated each ICE
on a seven-point scale regarding the significance
of the ICE during the specified period in relation
to achieving contract goals. The anchors follow:
critical (7) meaning that without the ICE, the
company could not have secured and/or completed
the client contract; important (4) meaning the ICE
helped in securing or completing the contract by
enhancing quality levels or shortening time periods
to achieve project goals; and finally useful (1)
meaning that without this ICE the contract would
still have been secured or the project could have
been completed. Nevertheless, this ICE did prove
useful in securing and completing the project and
with higher quality levels or within shorter time
periods (Herremans, Isaac, and Bays, 2007).
By collecting this information over the course
of a full calendar year, the partners could visualize
the dollar value arising from cash flows attributed
to each of these ICEs, as well as each ICE’s fre-
quency of use. For example, for every $100 Flare
generated from its IC, the E&P Catalog™ ICE
contributed $7.55. Although one might suspect
that the partners should know which of their bits
and pieces of knowledge, organizational processes,
and relationships were critical in developing cash
flows, this information was not really available
to them because Flare was operating virtually
on different projects and in different countries.
Therefore, the partners could now see which ICEs
were most critical to the firm and its success. With
this procedure, Flare was also able to note how
the ICEs were evolving over time.
The partners could readily see both frequency of
use and annual contribution of each ICE by classify-
ing them in a matrix (Herremans, Isaac, and Bays,
2007). Twenty three of the ICEs fell into Quadrant
C, 12 ICEs fell in Quadrant D, and the seven ICEs
that accounted for the greatest contributions as noted
above all fell in Quadrant B (please see Table 2).
None of the ICEs fell into Quadrant A.
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 International New Ventures, Organization Structure, and IC Management

Table 2. Annual Contributions to Cash Flow and Frequency of Use for 42 ICEs

Low Frequency High Frequency

High Contribution Quadrant A
Undesirable to have ICEs here. Represent
failure to exploit their potential
Low Contribution Quadrant C
Monitor to determine evolutionary stage.
Could be new, undeveloped ICEs, moving to
Quadrant B, or mature ICEs, moving from
Quadrant B
Quadrant B
Generator ICEs that are often used on
projects and are an important source of
revenue
Quadrant D
ICEs that facilitate the completion of
many projects but are low contributors
to revenues

It is best if none of the ICEs fall in Quadrant
A as this would mean that these ICEs create
high dollar amounts of revenues but are rarely, if
ever, used. Quadrant B containing the top seven
contributing ICEs are used very frequently. The
23 ICEs in Quadrant C require monitoring as
some of these ICEs are in the early stages of their
evolutionary paths and may move eventually into
Quadrant B. Others in this quadrant may be near-
ing the mature stage of their life cycles. The 12
ICEs in Quadrant D are facilitator ICEs and are all
important in contributing towards the completion
of projects (Herremans et al. 2007).
The Flare partners have gained considerable
knowledge as a result of using this technique.
From the partners’ point of view this exercise
has provided the following benefits (Herremans
et al., 2007):
1. The tracing exercise has assisted the partners
in strategy formulation in light of ICE dollar
contributions and frequency of use.
2. Flare is now in a position to track the evolu-
tionary life cycle of each ICE, and therefore
it is able to make strategic decisions based
on concrete information.
3. The partners can determine which ICEs
must be protected, differentiated from com-
petitors, licensed, sold or commercialized
(Barney, 1991) or retired, depending upon
factors such as life cycle, dollar contribution,
and frequency of use.
4. The partners learned that of the eleven cat-
egories of ICEs, six categories contained the
42 ICEs and these categories contributed the
following dollar amounts towards cash flows
for every $100 earned: technical knowledge
- $41; marketing - $36; concept formulation
- $9; team psychological processes - $5;
knowledge management support systems -
$5; and communications - $4. This kind of
information is crucial for strategic planning
purposes.
5. The exercise has ensured that all partners are
aware of all of the ICEs. The partners often
do not work on the same projects; and even
though knowledge sharing is often difficult,
it is crucial for the company. Thus, making
tacit knowledge explicit and shared is an
important activity within this company.
6. Finally, the partners gained further peace
of mind knowing which ICEs bring in the
greatest revenues and which ones do not.
This procedure provided greater insight into
the roles these ICEs play and their importance
through the assignment of dollar amounts.
FuTuRE TREnDs
As we continue to evolve in a society in which
many of our products are composed of bits and
pieces of knowledge, processes, and relationships,

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International New Ventures, Organization Structure, and IC Management
more MNCs will be grappling with how to build,
and then create and extract, wealth from their
intangible assets. Through the use of electronic
forms of communication and the ready market for
knowledge products, it is likely that more new
ventures will choose to participate in markets
located around the world immediately upon their
start ups. It is essential that these INVs recognize
the necessity to ensure that organizational char-
acteristics are conducive to knowledge creation
and extraction.
ConClusion
Flare Solutions Limited, operating as an INV,
has been successful both in combining resources
located internationally and finding markets for
their products in various locations around the
world. The partners set up their firm with a global
strategy and have developed appropriate organic
and mechanistic controls to ensure creativity for
the development of innovative new products, even
though Flare operates virtually. Interactivity and
trust have been central to their success. Given that
their only valuable resources are the knowledge,
processes, and relationships that they have devel-
oped, Flare began to investigate and manage its
IC with deliberate systems. The partners learned
that the management of IC does not have to be
an elusive and vague process. While most of the
literature on IC treats it as an intangible asset
and therefore suggests measures in terms of its
inputs and outcomes without actually identify-
ing it concretely, Flare went much further. Flare
went through a process that made its intangible
assets appear more tangible and therefore more
manageable, making it possible to attach monetary
values. The firm’s emphasis on organic controls,
with appropriate mechanistic controls to provide
concreteness to their virtual operations, allowed
interactivity and trust to grow and prosper within
the organization, leading to better management
of its IC.
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328

About the Contributors

Kevin J. O’Sullivan is an Associate Professor of Management specializing in Knowledge Management

and Information Systems at New York Institute of Technology. He also holds the posts of Associate Dean
and Chair of the Management and Marketing Department. He has over 16 years of experience IT and
KM experience in multinational firms and consulting both in the private and public sector in American,
Middle Eastern, European and Far Eastern cultures. Dr. O’Sullivan has delivered professional seminars
to global Fortune 100 organizations on subjects such as global collaboration, knowledge management,
information security and multinational information systems. His research interests include knowledge
management, intellectual capital, security and information visualization. He has been published in
journals such as the Journal of Knowledge Management, The Journal of Information and Knowledge
Management and the International Journal of Knowledge Management among others and has published
many book chapters, books, proceedings and papers as well as presenting at and chairing international
academic conferences.

***

Tom Butler is a Senior Lecturer in Business Information Systems, University College Cork, Ireland. A
former IT professional, he worked for 27 years in the telecommunications sector. Since 2005, Tom has
been conducting research on issues of corporate environmental responsibility through the applications
of Green IS/IT. Indeed, this strand of research grew out of his interest in institutional theory and his
experiences as lead researcher (2003-2006) on two action research projects on the design, development
and deployment of knowledge management systems (KMS) in public sector organizations. His work
has been published in the Information Systems Journal, the Journal of Strategic Information Systems,
the Journal of Information Technology, among others, and in the proceedings of major international
conferences such as ICIS, ECIS, and IFIP 8.2 and 8.6.

Jan Carrell, D.M., is a tenured professor of Business at Northwestern College and a registered nurse. She
received her Doctorate in Management from Colorado Technical University and her Masters from Trinity
in San Antonio, Texas. Her current field of interests includes Human Resources, Intellectual Capital, and
Organizational Behavior. She has presented most recently at Texas A & M American Management Semi-
nar and 2007 IABP AD Conference in Florida, and accepted for publication in The Business Renaissance
Quarterly. She is currently a full time professor at Northwestern College in the Business Department and
an adjunct professor at Colorado Technical University in health management and services where she teaches
undergraduate and graduate courses in business and healthcare. Her base of experience is derived from 30
years of hospital administration and years in teaching traditional and non-traditional students.

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
About the Contributors

Suresh Cuganesan is a Professor in Accounting at Swinburne University of Technology and also holds
an appointment as Visiting Professor at the Macquarie Graduate School of Management. Suresh has
worked in the areas of management consulting and finance. He currently occupies a position on CPA
Australia’s Business Management Centre of Excellence, and is a member of the Asian Board of the
American Academy of Financial Management. Suresh’s research interests are in the areas of strategic
costing, business performance, intellectual capital measurement and the design of management control
systems. He has published 3 books and over 50 articles, conference papers and book chapters and is also
on the editorial boards of a number of leading national and international academic journals. In addition to
his research, Suresh also advises and trains organizations in the fields of finance, business performance
measurement and intangibles management across private- and public sector organizations.

Leslie Gadman is a leading expert in the field of business and innovation strategy and organizational
change. As a former Managing Director at DukeCE, a spinoff of the Fuqua School of Business at Duke
University USA. he has delivered customized management education related to change management
worldwide. His clients include Sita, United Utilities, Hagemeyer, Hydro, GM, New England Life and
Bosch. He has written several books on change leadership and Innovation and as a former Cap Gemini
consultant has advised clients in multinational firms and new ventures in several countries, including
the United States, Switzerland, France, Lebanon, Jordan and United Kingdom. Leslie is the author of
“Power Partnering: A Strategy for Excellence in the 21st Century” and has a second book forthcoming
entitled “Open Source Leadership” which will be on the bookshelves this spring. He has published in
journals such as the Leadership and Organizational Development Journal, Journal of Management
Science, the Asian Journal on Quality, MIT’s Sloan Management Review. His research interests are
strategic innovation and change leadership; cooperative strategies; strategic processes including orga-
nizational learning, knowledge and competence development and strategic management practices in
emerging industries.

Ramón Sanguino Galván has served as a full-time professor of the Economical and Business Sci-
ences Scholl of the University of Extremadura. Years: 2000/2001 and 2001/2002, A full-time assistant
professor of the Economical and Business Sciences Scholl of the University of Extremadura. Years:
2002/2003 to 2005/2006 and a Professor with contract, Economical and Business Sciences Scholl of the
University of Extremadura. Since 26th October 2006. He has served as Secretary of the Department of
Business Administration and Sociology of the University of Extremadura since 01/02/2008. He earned
his European Doctorate in Economics and Business Science in January 2005 with his Doctoral thesis in
“Knowledge Management and Competitiveness: Spanish cities analysis”. Mark: Excellent Cum Laude
unanimously.

Marianne Gloet has a wide range of consultancy experience in Asia and North America in the areas of
knowledge management, HRM, HRD, management development and sustainability. She has worked on
projects in Canada, the USA, Vietnam, Hong Kong, Singapore, Malaysia and the United Arab Emirates.
Marianne’s 25 years of experience as a human resources consultant includes being the President of her
own successful technology company in Canada. Currently, Marianne is Chair of Business at the Abu
Dhabi Women’s College, Higher Colleges of Technology in Abu Dhabi, UAE. She can be contacted at:
marianne.gloet@hct.ac.ae

329
 About the Contributors

Audrey Grace is a College Lecturer in Business Information Systems at University College Cork. She
has over 12 years of industry experience, principally in the development, implementation and mobi-
lization of business solutions, from both a business and a technical perspective. Audrey is currently
completing a PhD with the Business Information Systems Department at UCC and already holds a BSc
in computer science; a CDip in accounting and finance; a HDip in management and marketing; and an
MSc in management information systems. She has had a number of research papers published in the
proceedings of IS international conferences and in refereed journal publications. Her current research
focuses on service co-creation between service professionals and clients, client-facing processes, and
information systems that enable individually tailored customer service interactions. Her research interests
also include learning in an organisational context, management of learning and the use of technology
to promote and manage learning.

Irene M. Herremans is the CMA-Alberta Faculty Fellow for the Haskayne School of Business at the
University of Calgary. She teaches in the accounting, tourism, and environmental management pro-
grams within Haskayne. She is also an adjunct professor for the School of Environmental Design. Irene
supervises graduate students in Haskayne, Environmental Design, and the Interdisciplinary Graduate
Program. Her research investigates sustainability performance and reporting, intellectual capital, and
management control systems. Irene has taught management courses in Mexico, Cuba, Slovak Republic,
Ecuador, China, the United States, and Canada. She has received many awards both for her teaching
and research.

Rob Isaac is a Senior Instructor for the Haskayne School of Business at the University of Calgary,
where he teaches both graduate and senior undergraduate courses. He conducts research in intellectual
capital and organizational culture. Apart from publications in these areas, he has also published articles
in organizational design, leadership, motivation and teamwork. Rob has worked abroad on numerous
occasions for the university in countries such as Poland, Cuba and Ecuador. He has given academic
presentations in Costa Rica, Australia, The Republic of South Africa, and other countries to academies
and business school faculties. He completed his PhD. at the University of Strathclyde, Strathclyde Busi-
ness School in Glasgow, Scotland.

Arla Juntunen holds a PhD in Marketing from the Helsinki School of Economics (HSE), Marketing
and Management Department, Finland and a Master’s degree in Administrative Information Systems
from the University of Helsinki. She is a post-doc researcher at the University of Helsinki, researcher
at the HSE and a Senior Advisor in Finland’s Supreme Command of the Police. Her research interests
focus on strategic management, innovation and business networks, and Management Information Sys-
tems (MIS).

Armond Manassian is an Assistant Professor for the Olayan School of Business at the American
University of Beirut in Lebanon. He teaches undergraduate courses in financial accounting and man-
agement accounting and a graduate course in financial reporting and analysis. He also administers the
financial accounting and management accounting modules in the Executive MBA program at AUB. He
conducts research in international accounting and issues pertaining to culture and its influence on ac-
counting systems with a more recent focus on intellectual capital. He conducts management accounting
workshops on a regular basis for participants from the Gulf countries including Saudi Arabia, Kuwait,

330
About the Contributors

Qatar, Oman, Bahrain, and the Emirates. He completed his PhD at the Haskayne School of Business at
the University of Calgary in Alberta, Canada.

Agustín J. Sánchez-Medina was born on Gran Canaria, Canary Islands, Spain. He is a PhD in Business
Organization and Management and has a Higher Degree in Business Administration and Management
and Degrees in Business Studies and Informatics. He is currently a lecturer at the University of Las
Palmas de Gran Canaria, where he teaches the subjects of Management Control, Enterprise Creation
and Business Administration within the area of Business Organization. Those teaching activities take
place in the Faculty of Economic and Business Sciences and in the University School of Informatics,
where he is also Deputy Director. His principal lines of research focus on intellectual capital, both in
firms and in territories, entrepreneurship, and sustainable development.

Mirghani Mohamed is an Assistant Dean with the School of Management, New York Institute of
Technology (NYIT)-Bahrain campus, teaching information systems technology and Knowledge Man-
agement principles. Before joining NYIT, Drs. Mohamed was the Associate Director for Technology
Operations and Engineering at The George Washington University in Washington, D.C., USA, he also
serves as the Director of the Knowledge Management (KM) Technology Center at the same university.
Drs. Mohamed holds M.Sc. and Ph.D. in Agronomy/Statistics, M.Sc. in Computer Science and D.Sc. in
Systems Engineering and Engineering Management with emphasis on Knowledge Management. Drs.
Mohamed is an Oracle and ITIL Certified Professional. He worked as a technical lead for deployments
of complex ERP and many other critical enterprise systems.

Mona Mohamed is an adjunct professor with New York Institute of Technology (NYIT)-Bahrain teach-
ing management and anthropology. Before joining NYIT, she worked as a communication coordinator
for Applied Knowledge Sciences (AKS). She also worked as a project planner for Nebraska Women of
Color Network. Mona was a graduate research assistant at the University of Nebraska- Lincoln carrying
research in the area of women’s rights. Before joining UNL Mona practiced law as a certified lawyer
in Wad Medani, Sudan. She can be reached at mona.mohamed@gmail.com

Jamal Nazari, is a PhD candidate in Accounting at University of Calgary and full time faculty at Mount
Royal College. His teaching responsibilities are in the areas of financial and management accounting.
He has taught accounting courses at Mount Royal College, University of Calgary, and Sharif University
in undergraduate and graduate levels. Jamal’s research interests include intellectual capital, managerial
accounting, and sustainability. He has conducted and intends to pursue research on the contemporary
issues of accounting in national and international contexts. His studies have been presented in numerous
conferences and published in publication outlets.

Tomás M. Bañegil Palacios has served as a Professor, Economical and Business Sciences Scholl of
the University of Extremadura since 1987. Since 2007 he has served as Director of the Department of
Business Administration and Sociology of the University of Extremadura. He received his doctorate in
Economics and Business Science and an MBA from the London Business School.

Matteo Pedrini is research fellow in ALTIS-Postgraduate School Business & Society of Catholic Uni-
versity of Milan. In 2007 he discuss his PhD thesis in Management and Firm’s systems on “Corporate

331
 About the Contributors

Responsibility and Stakeholder Management. The generation of intangible resources”. In his research
activities, started in 2002, he focused the attention on different issues regarding the relation between
business and society. In particular he leads studies on the relation between corporate responsibility and
performance, the intangible asset management, and social and ethical accountability. He collaborates in
teaching Introduction to Management and Corporate strategy at the Catholic University of Milan and
he teaches Corporate Responsibility in post-graduate courses.

Richard Petty is Associate Dean and Professor in Management (Accounting & Finance) at the Mac-
quarie Graduate School of Management, Sydney, Australia. He is Deputy President, CPA Australia and
serves on the organization’s Board of Directors. Richard is also Chairman of an investment company
headquartered in Hong Kong, and Chairman of the Hong Kong Annual Reporting A wards. Richard is
on the editorial board of The International Journal of Accounting Literature, and The Journal of Intel-
lectual Capital. His academic work has appeared in The Australian Accounting Review, The Journal of
Management Accounting Research, The Journal of Intellectual Capital, and The Accounting, Auditing
and Accountability Journal. Richard is a university medalist. He graduated with first class honors in
Accounting and Finance. He holds a Masters degree (with honors) in Commerce, and a Ph.D. Richard
is Fellow of CPA Australia, and also holds the CMA and MFP professional designations.

Isabel M. Prieto is an assistant professor of business administration at the Department of Business

Management and Market Research at the University of Valladolid, in Spain. She received her Ph.D.
from the University of Valladolid with a concentration in knowledge management and learning in or-
ganizations. Her current research is still focused in this topic, but looking to its application to the field
of human resources management and organizational capabilities. She is also involved on research about
organizational ambidexterity.

Elena Revilla is a professor of Operations management in Instituto de Empresa, Spain. She received
her Ph.D from University of Valladolid. She received the 1996 award for the best doctoral disserta-
tion granted by the Club Gestión de Calidad. She is the author of the book “Factores determinantes
de aprendizaje organizativo. Un modelo de desarrollo de productos”. Her major research interest is
organizational learning, innovation and management of technology. She has participated in national
and international research projects and published studies in different peer-reviewed academic journals
and collective books.

Robert Richardson received his Doctor of Medicine degree from the University of Florida, in June
1980 and completed his Intern, Resident & Chief Residency in Psychiatry at the Medical University of
South Carolina between July 1980 and June 1984. He is a member of the American Board of Psychiatry
and Neurology. Rob works in general psychiatry in the Mt. Washington Valley, New Hampshire and
his subspecialty is Integrating Psychopharmacology, Psychotherapy and Psycho spiritual Development.
Rob’s mission since 1971 has been to explore the human condition with the operating assumption that
the basic rules that guide the evolution of the universe are applicable at every level of integrative emer-
gence. In his own words: “I’ve encountered nothing in physics, chemistry, biology, medical science,
psychology, philosophy, information technology or the literature of the major religious and spiritual
traditions to dissuade me from the working hypothesis that we humans are active expressions of and
participants in the universe’s evolutionary nature. I’m confident that understanding human nature is

332
About the Contributors

necessary for understanding the nature of the universe and vice versa. Realizing that our universe is at
once interactive, integrative and emergent has fostered the revelation of three rules that are relevant at
all levels of evolutionary emergence. I’m suggesting that applying these three rules serves to clarify our
vision, deepen our shared understanding of evolutionary process and empower our creative participation
in any domain of experiencing.”

Herbert Robinson is currently a Reader in construction economics and project management and the
Director of the MSc Programme in Quantity Surveying in the Department of Property, Surveying and
Construction at London South Bank University (United Kingdom). He teaches knowledge management
to postgraduate students in construction project management, quantity surveying and planning buildings
for healthcare. He was previously a Senior Research Associate at Loughborough University (UK) where
he was involved in major research projects on knowledge and performance management. Dr Robinson
has published several book chapters and numerous journal articles on knowledge and performance
management and he is the co-author of a book titled ‘infrastructure for the Built Environment: Global
Procurement Strategies’ recently published by Elsevier Butterworth-Heinemann. After graduating from
Reading University with a BSc (Hons.) degree, he worked with international consultants Arup and in a
World Bank funded project before returning to academia. He holds a Master’s degree in infrastructure
planning and a PhD in infrastructure investment and resource management.

Rosa Nelly Trevinyo-Rodríguez is the TEC de Monterrey Family-Owned Business Chair at the Instituto
Tecnológico y de Estudios Superiores de Monterrey (ITESM), Campus Monterrey, and EGADE Monter-
rey Family Business Center Director. She received her PhD from IESE Business School, University of
Navarra, specializing herself in family business management. She worked for the legal firm Cuatrecasas
(Barcelona) within the civil, administrative law and tax litigation department writing family business
constitutions and offering advice to several governmental institutions and foundations in Spain, U.S.,
Mexico, Ecuador, Chile and Argentina. Her main research interests include intergenerational knowledge
management and transfer in family business contexts, as well as business families’ next generation
members training.

Alan M Thompson is knowledge manager for Production Services Network Ltd. (PSN), headquartered
in Aberdeen, Scotland. Following a career in shipbuilding and marine consultancy, he joined the oil and
gas industry in 1980 and has held a variety of project management roles, including managing research
and development projects for a national oil company. A chartered naval architect and European registered
engineer, Alan also holds a BA in mathematics, an MBA in project management and organizational
development, and an MSc. in knowledge management. He is a guest lecturer at The Robert Gordon
University’s Aberdeen Business School, regular presenter at knowledge management conferences in
Europe, and has authored several articles on knowledge management, and on oil field development.
Alan is also an inventor and patent holder, mainly in oil field conceptual development, and in marine
rescue, which have spurred his academic research into how companies respond to “intrapreneurs” and
related intellectual capital issues.

333
334

Index

A customer capital 146, 209

Amiedu 65, 68 D
assimilation 152, 154
Danish Agency for Trade and Industry (DATI)
B 141, 142, 143
decontextualization 144
benchmarking 142
differential reporting 83
bivalent logic 153, 154
diffusion of innovation 44
build-operate-transfer (BOT) 96
disconnect 17, 27, 38
business performance 160, 161, 165, 166, 167,
disruptive events 7
168, 169, 170, 171, 175
downsizing 9
C E. I. du Pont de Nemours and Company (Du-
Pont) 207, 212, 213, 214, 215, 216, 217,
capital markets 81, 82 218, 219
CEM Corporation 235, 237, 238, 239, 240,
241, 242, 243, 244, 245, 246 E
codification 144, 145, 153, 154
Elisa 60, 63, 64, 65, 66, 67, 68, 72, 73
commitment 44, 45, 46, 47, 48, 49, 50, 51, 52,
epistemic community 159
53, 54, 55, 56, 57
exploitation processes 166
commitment based value networks 44, 46, 54
exploration processes 166
commitment, synergistic 45
externalization 145, 153, 155
community of practice (CoP) 6
competitive advantage 160, 161, 164, 169, F
170, 171, 172, 173, 207, 208, 209, 210,
211, 212, 215, 218 family firms 207, 208, 209, 210, 211, 212, 215,
continuous learning 227 217, 218, 219, 220
control systems 271, 276, 277, 278, 285 family firms, growth stages of 216
core values 7, 11 family wealth 210, 211, 212, 216, 217
corporate citizenship 179 fiduciary reporting 83
corporate responsibility 179, 182, 183, 184, financial performance 179, 180, 181, 182, 186,
185, 192, 195, 198 188, 190, 197, 198, 200, 203, 204, 206
corporate social responsibility 199, 203, 205 financial reporting 75, 76, 77, 78, 80, 85, 86,
corporate sustainability 119, 120, 123, 124, 89, 92
128, 130, 131, 132, 134 Foreign Investment Advisory Service (FIAS)
country’s intellectual capital 254, 255, 262 70

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Index
G intellectual capital (IC) 1, 2, 3, 5, 6, 8, 11, 13,
gap 17, 18, 27, 28, 29, 34, 37, 38, 43
globalization 145, 148, 150, 151, 153, 154, 158
H 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92,
Hewlett Packard 65
human capital 145, 146, 147, 148, 150, 151,
153, 155, 185, 186, 188, 189, 190, 200,
202, 234, 235, 236, 246
human capital management (HCM) 221, 222
human resource management (HRM) 221, 223,
224, 225, 226, 227, 230, 231
human resources 17, 18, 19, 20, 22, 29, 39, 41,
42
I 213, 215, 216, 217, 218
IC disclosure 83, 84, 86, 87, 88
IC information 78, 82, 86, 87, 88
ICL 65, 68, 73
IC measurement 75, 76, 77, 78, 80
IC models 138
IC report 79, 81, 82, 83, 84, 85, 89
IC reports 137, 140, 141, 142
ICT 58, 59, 60, 62, 63, 68, 69, 70, 71, 72
ICT-sector 58, 59, 60, 62, 63, 69, 70
identity building 46
identity, corporate 46, 53, 54, 55
identity creation 47
identity defining commitments 44
identity, national 53, 54
identity, personal 45, 46
identity seekers 46
individual identity 45, 46, 49, 51, 53, 54, 55
information technology (IT) 234, 235, 236,
237, 247
intangible assets 23, 24, 25, 26, 28, 41, 137,
144, 146, 151, 153, 155, 157, 249, 251,
254, 255, 256, 257, 258, 260, 261, 262,
263, 265, 266
intangible capital 136
intangible resources 178, 181, 182, 185, 186,
187, 188, 191, 193, 194, 195, 196, 197,
198
integrative interactive emergence 55
17, 18, 21, 22, 23, 24, 25, 26, 27, 28, 29,
30, 31, 34, 35, 37, 38, 39, 40, 41, 42, 43,
58, 59, 68, 69, 75, 76, 77, 78, 79, 80, 81,
93, 95, 96, 97, 98, 99, 102, 103, 104,
105, 106, 107, 108, 109, 110, 111, 112,
113, 114, 119, 120, 121, 122, 123, 124,
125, 126, 127, 128, 129, 130, 131, 132,
133, 134, 135, 160, 164, 165, 167, 172,
173, 175, 176, 207, 208, 209, 210, 211,
212, 215, 216, 217, 218, 219, 220, 234,
271, 274, 275, 276, 277, 278, 279, 281,
283, 285
intellectual capital of family businesses (ICFB)
family wealth matrix 207, 208, 211, 212,
intellectual capital of territories 249
interactivity 271, 278
international joint ventures (IJVs) 96
international new venture (INV) 271, 272, 273,
277, 283
Iran 95, 96, 97, 98, 99, 100, 101, 102, 103,
104, 105, 106, 107, 108, 109, 110, 111,
114, 115
K
knowledge 271, 272, 273, 274, 275, 276, 278,
279, 280, 281, 282, 283, 284
knowledge assets 119, 120, 121, 122, 123, 124,
125, 126, 128, 129, 130, 132, 133, 134
knowledge, corporate 128
knowledge-creation 223, 230
knowledge, explicit (codified) 122, 127
knowledge intensive organisations 119, 120,
122, 123, 130
knowledge management (KM) 58, 61, 62, 72,
119, 120, 121, 124, 125, 126, 127, 128,
129, 130, 132, 133, 134, 135, 136, 137,
139, 143, 221, 222, 231, 232, 233, 236
knowledge management tools (KMT) 154
knowledge, organisational 122, 126, 128
knowledge resources 160, 161, 164, 165, 166,
167, 168, 169, 170, 171, 172
knowledge sharing 222, 223, 227, 230
knowledge, tacit 122, 127, 128
335

L O
leadership capabilities 222, 228, 229, 230
learning capability 160, 161, 165, 166, 167,
168, 169, 170, 171, 172
learning environments 226
learning management systems (LMSs) 235,
236, 237, 243, 245, 246, 247
learning processes 160, 161, 162, 163, 165,
166, 167, 168, 169, 170, 171, 172, 174
Lebanon 95, 96, 97, 98, 99, 100, 101, 102,
103, 104, 105, 107, 108, 109, 110, 111,
113, 114, 115
local subsidiaries 163, 164, 166, 168, 169, 172
long-term sustainability 226
M organizational structure 1, 4, 5, 14
macro-level socio-economic indicators 95, 111
management theorists 17, 18
managers 1, 2, 5, 6, 8, 9, 14, 15
managers, middle 9
market value 119, 123, 132
measuring intangibles to understand and im-
prove innovation management (MERI-
TUM) 137, 140, 141, 142, 143
mechanistic control 277, 278
The Middle East 95, 101, 102, 104, 107
multinational corporations (MNCs) 95, 96,
101, 102, 104, 109, 111, 113, 115
multinational enterprises (MNEs) 160, 161,
162, 163, 164, 165, 166, 168, 169, 170,
171
N social responsibility 249, 250, 251, 266, 270
national IC stocks 97, 98, 111, 113
national intellectual capital 255, 268
nation’s intangible assets 255
network externalities 149
networks, expert 149, 150
Nokia 60, 62, 63, 64, 65, 66, 67, 68, 72, 73
non-financial indicators 137
Nordic Project for the measuring Intellectual
Capital (NORDIKA) 140, 141, 142
336
Index
oil and gas industry 2, 3, 4, 5, 9, 13
open source (OS) 48, 51, 54, 56
organic structure 275, 276, 278
organisation for economic co-operation and de-
velopment (OECD) 137, 138, 141, 143
organizational capital 185, 186, 192, 193, 209,
234, 235
organizational characteristics 95, 97, 102, 108,
111, 112
organizational climate 95, 97, 104, 105, 113
organizational culture 9, 95, 102, 104, 107,
109, 112, 113, 115
organizational learning 226, 234, 235
organizational processes 279, 281
organization, matrix 4, 13
organization, multinational 1, 6
organizations, evolution of 17, 22, 29
P
physical capital 119, 120, 121, 124, 234
R
R&D 58, 59, 60, 63, 65, 66, 68, 69, 70, 71
region’s intangible assets 255
relational capital 185, 186, 191, 192, 279
relationship risk matrix 265
relationships 271, 274, 275, 279, 281, 282, 283
S
stakeholder management 178, 182, 183, 184,
185, 188, 189, 190, 191, 192, 193, 198
strategic direction 6
strategic focus 226
strategic intention 8, 11
subject matter expert 5
subsidiaries 144, 145, 147, 148, 150, 151, 153,
154
sustainable development 249, 250, 251, 252,
253, 256, 258, 260, 261, 262, 263, 264,
265, 266, 267, 268, 269, 270
sustainable development evaluation tool 249,
251, 255, 256, 264, 265, 266
Index

synthesis 144, 152, 153, 154

T
The National Technology Agency (Tekes) 65
toolkit 193, 194, 195, 197
trust 271, 275, 276, 277, 278, 279, 283, 284
21st century environment 22, 27

V
value networks 44, 45, 46, 53, 54, 55
voluntary reporting 81, 82, 84

337