The value of intellectual capital

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.

Because intangibles are non-physical, the value of intangible assets must me measured indirectly.
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.

Customer Capital (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 site)

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 well!

Better understanding and measurement of intangibles in the future is subject to pending intangibles accounting practices.

Compare with Intellectual Capital: Cost-Benefit Analysis

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