By H. Randall Goldsmith, PhD
Technology means different things to different people. Webster defines technology as the science or systematic knowledge of the industrial arts. A commonly accepted practical application of the term technology is a state of the art product, process, material, design, or know-how. Generally speaking, technology is a product of research and development. While R&D is a common term used everyday, it has multiple dimensions and implications. First, some organizations do research, some organizations do development, some organizations do research and development. Sometimes it is difficult to determine who does what and when. For instance, consider the "R" of R&D – "research." There are two kinds of research, basic and applied.
Basic research is the scientific process of discovering knowledge. Who does basic research? Scientists do. Scientists generally have a narrow field of interest or study where they apply a universal set of procedures and protocols known as the scientific method. Scientists operate by a strict code of ethics and discipline in their pursuit of knowledge. The concept of "All's Fair in Love and War" is incomprehensible in their pursuit of knowledge. Basic research is built upon a foundation of collegiality and peer review.
Applying economic terms to the field of science, one could say science is "market driven" as scientists generally determine for themselves what areas of research they pursue. In the case of public sector scientists, the pursuit is influenced by the source of public research dollars that is largely determined by Congress. Of course Congress makes its decision based upon the hot issues in any given year -- telecommunication, defense, space, cancer.
Where is basic research done? Universities and federal labs conduct 75 percent of basic research while industry conducts a much smaller percentage. Since basic science is incremental in nature, it seldom generates headlines. The results typically are found in technical journals.
Applied research is conducted primarily by industry. This work involves taking the knowledge gained from basic research and determining whether it has any practical application by man. For instance, basic research discovers that carbon atoms can be configured to construct microscopic tubes. Applied research discovers these nanotubes have the ability to desalinate seawater, conduct electrons and photons, and demonstrate extraordinary strength characteristics.
The other half of R&D is "development." Most development is done by industry. Development represents the early stage of technology commercialization. In the example of the desalinating nanotubes, a water purification company could license this technology and commercially apply it to filter systems to be used in desalination plants. Who knows whether this technology could lead to a new source of fresh, clean water for the entire world and a complete restructuring of the geopolitical order of nations? Likewise, a microchip company might elect to develop the conductive properties of nanotubes for smaller, faster microprocessors. Not only must the company develop the commercial application of the technology, it must develop the manufacturing process, the sales force, distribution channels, customer base, and supporting business systems.
It is the Thomas Edisons, Jonas Salks, and Albert Ensteins of the world who have contributed to U.S. economic supremacy. It is U.S. scientists who provide the intellectual capital that justify tax dollar investments in basic research. Basic research is the U.S. goose that lays the golden eggs. Starve the goose and the U.S. will have fewer golden eggs.
Forty billion dollars is a lot of money. This impressive amount of capital is the total level of economic activity created in the U.S. from the commercialization of academic research. The Association of University Technology Managers reports that university technology transfer results in the creation of several hundred new advanced technology enterprises each year. Nearly 80 percent of these new companies established business operations in close proximity to the academic institution where the discovery was made.
In terms of economics, a license agreement is executed between a business and a university for approximately every $6.5 million invested in research, for every $65 million in research a new high tech company is born, and a high performance job results from every $85,000 of research. This may sound like a high cost for a start-up and jobs, but they are only benchmark measures. As far as the universities are concerned, start-ups and jobs are icing on the cake since they are not the driving motivation of research. Three or four companies a year per university might not sound like many, but within a decade the number takes on critical mass. Finally, if history is a prelude to the future, a significant number of these ventures will be dominant corporations that define the global economy.
Buying a McDonald's Big Mac hamburger with a unit of intellectual capital would be difficult. Dollars and cents, debits and credits, assets and liabilities are financial terms widely understood by all, but "intellectual capital" is a more difficult concept. However, whether or not the business markets fully understands or appreciate the term, investing behavior implies that technology investors embrace the concept with gusto. The evidence is in the growth of the stock market over the last two decades in spite of market volatility.
The term "intellectual capital" conjures up different images for different people. Some might picture a fuzzy haired, wild-eyed scientist with test tube in hand spouting obscure formulas. Others might think of an engineer with obligatory white short-sleeved shirt and skinny black tie, pocket protector loaded with pens and pencils. None of these would be wrong, but it is much more than a stereotype – much more. The market doesn't invest billions of dollars in stereotypes.
Two well-respected technology licensing professionals, Patrick Sullivan and James O'Shaughnessy, define intellectual capital as "the sum of a firm's ideas, inventions, technologies, general knowledge, computer programs, designs, data skills, processes, creativity and publications." They say intellectual capital consists of two major categories, human capital and intellectual assets. Human capital is generally attributable to people who are the source of imagination, ideas, creativity, and skills within an organization. Intellectual assets require a little more explanation.
Intellectual assets are created when people commit to media any knowledge, know-how, or learning. It is the "codified knowledge" of human capital. It consists of plans, procedures, memos, sketches, drawings and blueprints, computer programs etc. Some of these are captured in print media and others electronically. If any of these are legally protected with a patent, copyright or trademark, they are called intellectual property. These include patents, copyrights, trademarks, and trade secrets. Intellectual assets are important; they don't walk off the job! The company owns the intellectual assets. They don't own human capital. Employees can leave the company and take their know how and talents with them. In summary, intellectual capital breaks down into two categories: human capital and intellectual assets. In addition, intellectual assets legally protected by patents, copyrights, and trademarks are termed intellectual property.
The currency of the New Economy is intellectual capital. Knowledge companies are ones whose primary assets are knowledge-based. These assets are generally referred to as intangible assets under general accounting practices. In the past, references to intangible assets on a balance sheet were ignored or discounted. Intangibles on the balance sheet were often considered a lame effort to puff up the financials. No more. New Economy companies frequently are acquired for millions of dollars above their book value. The difference in the asset value of the company and its purchase price is explained as "good will." Good will consist of intangible values such as installed customer base, strategic partnerships, technical competencies, and intellectual assets.
Revisiting the question, "Where can you spend intellectual capital?" The answer is anywhere. Follow the logic. Knowledge companies convert intellectual capital to intangible assets. Intangible assets are converted into profits. Profits are converted to value and value into wealth. Thus, building personal income, corporate profits, community wealth and industry clusters are driven by knowledge captured in an innovative environment. The primary source of U.S. intellectual capital is from research. Our future is directly tied to our state and nation's ability to support research.