Chapter 1
In the Know – The Knowledge Economy in the Twenty-first Century

A Brief History of Knowledge

First of all, what is knowledge? This might seem an extraordinary question, but it is vital to be certain what we are discussing. When managers invest their organization's funds to buy-in new knowledge, skills or technology, do they always fully recognize the element of knowledge creation – and the need to acquire that knowledge for their company? Collectively, do we recognize within organizations the value of knowledge?

The UK's Concise Oxford Dictionary is disappointing in its definition of knowledge: 'a theoretical or practical understanding of a subject, language etc., the sum of what is known ... certain understanding, as opposed to opinion'. For the purposes of this book, knowledge means accumulated experience, data and understanding gained by practical enquiry, reduced to useful applications. Furthermore, in the context of this book, with its emphasis on buying knowledge, we might add that knowledge contributes to the measurable 'intellectual capital' of organizations.

The heading above, a brief history of knowledge, is obviously tongue in cheek. What follows here is an admittedly selective canter through the major areas of human knowledge and recent trends in organizational development, as they relate to knowledge. This is simply to alert us to the breadth of knowledge now at the disposal of mankind.

The Encyclopaedia Britannica, 11th edition, categorized knowledge into 24 areas, alphabetically arranged. Although now considered rather passe by Encyclopaedia Britannica, which in later editions reassembled knowledge into ten basic areas, the 11th edition categories serve our purpose well enough:

1. anthropology and ethnology
2. archaeology and antiquities
3. art
4. astronomy
5. biology
6. chemistry
7. economics and social science
8. education
9. engineering
10. geography
11. geology
12. history
13. industries, manufactures and occupations
14. language and writing
15. law and political science
16. literature
17. mathematics
18. medical science
19. military and naval
20. philosophy and psychology
21. physics
22. religion and theology
23. sports and pastimes
24. miscellaneous.

The 15th edition of the Encyclopaedia contains in its introduction a short article by Mortimer J. Adler about the philosophy of knowledge. In considering humankind's thirst for knowledge, Adler commented:

Senior and middle-ranking managers in industry, government, commerce, academe, the military and other enterprises interact with other organizations, colleagues, regulatory agencies and a range of 'stakeholders'. Sometimes the need for new information is competitively driven – the need to get ahead or stay ahead of the competition. Sometimes the need for new information is collective in its incentive, where information is freely shared in the expectation of collectively gaining more knowledge. Whatever the motivation, managers must recognize when a requirement for new information has emerged and not confuse it with other acquisition objectives, where the need for knowledge may only be a secondary consideration.

Figure 1 Organizations at work – pressures to advance knowledge

What are the pressures on organizations today to advance knowledge and to keep abreast of new knowledge in the knowledge economy? Some of these pressures are suggested in Figure 1. New technologies pull organizations to new levels of efficiency and effectiveness; existing technologies push laggard organizations to catch-up. There are knowledge stakeholders both within and external to the organization. Markets and regulatory trends also push the organization to new areas of knowledge competency. Bought-in knowledge is another stimulus that can advance and quicken the transition to new knowledge competencies.

The Growth of Knowledge

We have already observed in the Introduction to this book that the twentieth century may, in retrospect, be viewed as the century of exponential growth of knowledge. It is worth adding that the rate of increase in knowledge accelerated dramatically in the last quarter of that century. The twenty-first century, no matter whatever else it may be marked by, will be characterized by accelerated growth in knowledge. The information age is here.

Can organizations really buy knowledge? Is not knowledge something that is acquired by diligent study and hard work? It is the author's view that not only can organizations buy and internalize knowledge, but that this will become an increasingly common element of organizational life in the near future, indeed a core competency for managers in the first decade of the twenty-first century. Knowledge-buying processes need to catch up with the reality of the information age. Already knowledge management (popularly known as KM) is a growing discipline of management. Knowledge buying will become a subset of KM. For the knowledge-based organization the core competency for survival is KM. In the knowledge-based economy at the beginning of the twenty-first century, KM is a critical element of strategy that allows organizations to accelerate the rate at which they handle new challenges and opportunities, by leveraging the key resources of collective know-how, talent and experience.

New knowledge abounds. For some organizations, new knowledge must be created specifically, but in a dynamic and constantly changing knowledge economy, the value of today's knowledge is of less and less duration. Knowledge has been likened to radioactive isotopes, in that its value decays at various rates based on its composition.

The difficulty in acquiring new knowledge can be a factor of how close the knowledge owner, broker or stakeholder is to your organization. The proximity of knowledge can be thought of as a series of concentric circles with the 'distance' of knowledge agents from your organization plotted as suggested in Figure 2. It may be beneficial to create a similar chart for your own organization, carefully thinking through how different knowledge agents interact and what sort of commercial relationship will best serve both parties' needs.

Figure 2 Organizations at work – knowledge proximity

Technological Research and Development

Plainly, not all new knowledge of significant value to organizations emerges from the field of science and technology. But it is probably true that significant disruptive technologies³ will emerge from the science and advanced technology sectors. So an understanding of science policy is useful background to the development of a KM strategy.

Accurate data on research and development (R&D) expenditures are notoriously difficult to obtain. The basis on which costs are allocated to research varies from company to company as well as from country to country. Even definitions of what is, and what is not research, do not have universal acceptance.

Many companies are reluctant to reveal the true extent of their R&D investment and can legally (within the accounting rules of most Organization for Economic Development [OECD] countries) apportion expenditures to disguise exactly where money is being spent. To overstate or accurately state R&D expenditure may invite unwelcome scrutiny by investors and competitors: to understate may reveal an unpalatable truth about the company's trading position. As with companies, so it is with countries that have differing accounting policies and, for political reasons, may also wish to reflect their technological prowess in a more favourable light.

It must be said, then, that the figures quoted even by such august bodies as the OECD may reveal only a distorted picture of R&D expenditures. The following table (Table 1) which shows the percentage increase in corporate R&D over the period 1992/96 and which is based on OECD figures, can however be taken as generally accurate.

Table 1 National corporate R&D spend: acceleration 1992-96

Table 1 indicates countries in which companies are accelerating R&D spend (column 1) together with their R&D/sales ratio (Column 2) which indicates the ratio of R&D expenditure to sales income. Finally the Price/Earnings (P/E) ratio in column 3 shows the average P/E ratio across all industry sectors. Whilst acknowledging the 'broad-brush' nature of these figures, they do reveal that in some countries commercial companies are investing heavily to strengthen their technology base. Traditionally strong countries (Germany and Japan) are temporarily slowed, but both have a massive advantage in R&D investment that is likely to be maintained. It may take until 2015 or longer for Germany to overcome the fiscal indigestion of unification. This may give her local competitors an opportunity to narrow the technology investment gap. A higher than average increase in investment by some countries may indicate a pre-existing investment gap that they are trying to close, or that they are targeting new technology opportunities.

The most often quoted comparison of international expenditure on research and development is gross domestic expenditure on R&D (GERD)⁴ as a percentage of GDP. GERD includes all expenditure on R&D, both public and private sector, civil and military. Recent figures are given in Table 2.

Useful publications for managers who need more data on international comparisons of R&D can be found in:

• The OECD publication: Main Science and Technology Indicators. This is published annually and is obtainable in the UK from the Stationery Office

• The UK R&D Scoreboard. This is published in the UK annually and is obtainable free of charge from the UK Department of Trade and Industry. Also available on line at the DTI website: www/innovation.gov.uk

Table 2 Gross domestic expenditure on R&D as a percentage of GDP

Global aggregate R&D expenditures are very large. The US alone spends approx $280 billion pa on civil and military R&D and the rest of the world is estimated to bring this figure in dollars equivalent to $645 billion. Estimating levels of externally sourced contract research is difficult, but assuming the figure is of the order of 10% for bought out R&D services, in the sense of purchasing knowledge via specific, packaged work, the market for contract research may globally be worth $70 billion. Add to this the cost of bought-out goods and services and capital investment in facilities, then the annual total spent by researchers around the world is of the order of $100 billion to $120 billion.

The division of this expenditure between government and industry is indicated in Table 2, which shows an interesting level of parity between the US and the EU. Closer inspection reveals, throughout the Western bloc, that there has been a retreat by governments from R&D investment with the shortfall being taken up by industry. The difference between private and state funding for R&D is most pronounced in Japan, with industry funding the lion's share. This is all the more emphatic considering the comparative lack of military R&D by Japan and the fact that in the US military R&D accounts for 50% of all US R&D funding. This goes some way to explain the Japanese dominance in export revenue-earning advanced-technology consumer goods of all types. Reliable comparative data for the former Soviet bloc nations and China is not available.

Different industries invest in R&D at different rates: Table 3 compares the level of R&D as a percentage of sales for seven industry sectors. Aerospace, at nearly 20% of sales, is clearly the leader in this particular league. It does not, however, follow that contract research expenditure is similarly high. Aerospace must of necessity spend the bulk of its research and development funds in-house, although a high proportion of this will be in work force and other goods, materials, services and facilities types of expenditure. Similarly, pharmaceuticals also spend a high proportion in-house, but are increasing the extent of bought-in knowledge – otherwise known as contract research.

Table 3 R&D spend–government and industry share of total-trend 1981-93

Table 4 Industry sector R&D investment as a percentage of sales

At the other end of the spectrum, the energy industries which invest a comparatively low level of R&D funding to secure sales – perhaps reflecting a lack of technological competition in these highly regulated industries – are big spenders on external research. This may also reflect, in the Western G7 countries in particular, the influence of the four 'Rs' – Restructuring, Right-sizing, Rationalization and Re-engineering, which has hit hard on R&D budgets throughout the energy sector and led to an increased emphasis on buying in research that even a few years ago would have been seen as a core capability and carried out in-house.

The place of contract research in the EU in terms of national shares of the overall market was estimated by Buy Research (Cambridge, England) in 2002 as being:

Considering the relative size of the R&D budgets for these nations, these comparative expenditures suggest that France and Italy under utilize outsourced R&D opportunities.

Table 5 Top 10 corporate R&D investors – national ranking 2001-03

Table 6 Global top 700 corporate R&D investors: national ranking 2002-03

The financial sums expended by the major corporate investors in R&D are impressive. The figures in Table 5 show the top ten R&D spenders in 2001 and 2002. It is notable that the expenditures for the group even at the bottom have increased dramatically.

Of the global top 700 corporate investors in R&D in 2002/3, the nation by nation ranking given in Table 6 shows in each year the number of representatives within those 700 (left column) and their aggregate spend (right column, in pounds sterling equivalent).

These corporate expenditure figures indicate that, by comparison with previous years' statistics, the US and Japan are increasing their lead. In the case of the US this is unsurprising, given the state of the burgeoning US economy. For Japan and South Korea, in severe recession over the period, the expenditures show considerable corporate commitment to technology. France and the UK have maintained their positions.