The Value of Intellectual Capital.
Do intangible assets yield
a return above the cost of capital?
Of course intellectual
capital or intangible assets normally create shareholder value (above the
cost of capital), otherwise companies would not invest in them. However, how
much value do these intangibles actually create? This is a tough question to
answer, and to a large extent the answers must still be found.
intangibles are non-physical, the value of intangible assets must me
Generally, the value of intangibles can be measured by input indicators
(such as R&D, acquired technology or investments in information technology)
or by output indicators (such as the number of patents, the number or
quality of citations, or the number of innovations brought forward).
For Research &
Development (R&D) (the only intangible asset reported separately in
corporate financial statements) there has been substantial research, showing
that estimated rates of returns are in between 20-35 percent annually.
- The contribution of basic research often turns out to be
much bigger than the contribution of product development or of process R&D
(although riskier as well).
The value of
organizational capital (business processes, often combined with -innovative-
use of information technology) can be very substantial. However a good
mechanism to determine it’s exact value appears to still be missing. Dell’s
innovative Supply Chain system and Fedex’ innovative Package Tracking System
are often mentioned examples in the literature.
(which can be seen as a special form of organizational capital) should be
regarded as an intangible asset rather than cost if and to the extent that,
based on the past industry experience and the specific company, customers
can be expected to stay well beyond the current year and be expected to
contribute to revenues for a longer period. Brands and trademarks can be
used as output indicators of customer capital value. The customer capital
value of internet companies/sites can be estimated also by the sites reach,
stickiness and loyalty (click here HYPERLINK for the customer data of this
The value of Human
Resource intangibles remains very hard to measure by 2004.
- Quantitative methods and results to measure the value of
human resource expenditures are still in their infancies.
- However, programs for training, (incentive-based)
compensation systems, evaluation methods and knowledge systems (intranets)
CAN create human resource capital and shareholder value, provided they
generate (future) benefits that exceed the cost of capital. Note: of course
these kinds of initiatives serve other values as
and measurement of intangibles in the future is subject to pending
intangibles accounting practices.
Compare with Intellectual Capital: