Investment in Knowledge

The OECD has produced a composite indicator of “Investment in Knowledge” which made of:

  1. Investment in R&D
  2. Investment in higher education
  3. Investment in IT software

By this measure, we can identify three groups of economies:

  • High knowledge investment economies, they are investing around 6 per cent of GDP
  • Middle knowledge investment economies, they are investing between 3 and 4 per cent of GDP
  • Low investment economies, they are investing between 2 and 3 per cent. of GDP.

The story of the past decade has been for most of the high investment economies to pull away from the rest. Most high investment economies stepped up their knowledge investment by between 1 and 2 percentage points of GDP while the middle and low investment economies showed relatively little change.

Globalisation and the knowledge economy

The development of the knowledge economy and the globalisation has been closely related. Global firms have built integrated international production chains, with their R&D facilities kept in the US and Europe creating new products that are built in assembly plants in China and India, then shipped back to the West for added value in “knowledge” areas such as design and marketing and providing associated services in Europe and the US.

The growth of the knowledge economy is seen as part of the strategic response to the threat to the jobs in the OECD from the low wage economies imports such as China and India.

As a response the low wage economies such as China and India are increasing their Investment in Knowledge heavily in, defined both as the share of GDP devoted to R&D and increasing the numbers of home grown graduates.

The implication is that through these investments in knowledge the lower wage economies will capture a much larger share of the “knowledge based” segments of the international production chain in the future unless the Western economies become even more competitive in these areas.

How to define and measure the knowledge economyInvestment in Knowledge

Without measurable definitions, the knowledge economy will remain a vague concept. The impact of the knowledge economy on industrial organisation, institutional structures, employment and society would remain more a matter of assertion and intuition rather than demonstrable proof based on hard facts. We can summarise the key features of knowledge economy and knowledge economy organisations as follows:

  • The knowledge economy represents a “soft discontinuity” from the past – it is not a “new” economy operating to a new set of economic laws
  • The knowledge economy is present in all sectors of the economy, not just the knowledge intensive industries
  • The knowledge economy has a high and growing intensity of ICT usage by well- educated knowledge workers
  • A growing share of GDP devoted to knowledge intangibles compared with physical capital
  • The knowledge economy consists of innovating organisations using new technologies to introduce process, organisational and presentational innovation
  • Knowledge economy organisations reorganise work to allow them to handle, store and share information through knowledge management practices.

Three ways in which the knowledge economy might be defined more precisely in ways that are measurable and therefore, in principle, testable against hard data:

  1. Industry sector definitions of knowledge intensive industries and services
  2. Occupational based definitions of knowledge workers
  3. Innovation related definitions of the share of innovating firms.

Knowledge intensive sectors

The OECD identifies high and medium tech manufacturing; high value added “knowledge intensive” market service industries such as finance and insurance and telecommunications; and business services. The current OECD definition also includes education and health. The Work Foundation has extended this definition in the recent Ideopolis report to capture a higher share of employment in the cultural and creative industries.

The OECD wide definition of knowledge based industries indicates that Ireland was the most knowledge based economy in the OECD, with these industries accounting for 48 per cent of GDP followed by the US, Germany, and Sweden with around 43 per cent. The knowledge based industries accounted for around 40 per cent of GDP in the UK and France. Estimates for Japan are only available on the more restricted market based industry definition, excluding health and education. However, on this basis Japan has a less knowledge based industrial structure than Germany, the US, the UK or France. (based on 2005data)

Knowledge jobs and knowledge workers

There are (at least) three ways we can work towards a definition of knowledge workers:

  1. All those who work in the top three standard occupational classifications (managers, professionals, associate professionals)
  2. All those with high levels skills, indicated by degree or equivalent qualifications
  3. All those who perform tasks that require expert thinking and complex communication skills with the assistance of computers.

Knowledge workers account for about 42 per cent of all employment in the UK in the first quarter of 2006, using the occupational definition of the top three occupational groups. This compares with 31 per cent of total employment in 1984, according to the latest projections prepared for the Sector Skills Development Agency (SSDA). The SSDA is projecting the share will grow to just over 45 per cent by 2014.

The underlying story is one of fairly stable constant structural change in the labour market decade on decade. The share of knowledge economy jobs has increased by between 4 and 5 percentage points in each decade, while the share of unskilled jobs has fallen by about 2 and 3 percentage points in each decade.

International comparisons are difficult because of differences in occupational classifications and how these are interpreted in national surveys. The best comparable data we have found to date suggests that in 2004 or latest year available between 40 and 45 per cent workers in the smaller North European economies, North America, and Australia are knowledge workers. The UK lies alongside Germany and Canada, but behind the Nordic economies, Switzerland and the Netherlands.

Knowledge workers in the UK economy 1984-2014

Occupations

1984

1994

2004

2014

Knowledge workers

31%

36%

41%

45%

Personal services; sales; admin/clerical

25%

28%

28%

28%

Skilled/semi- skilled; manual

28%

23%

19%

18%

Unskilled jobs

16%

14%

11%

9%

Note:2014 projected. Knowledge economy jobs are managerial, professional, associate professional standard occupational classifications. Personal services include care, recreational, and some hospitality jobs. Employees and self-employed. Source: Working Futures 2004-2014, table 4.1

Human skill definitions

An interesting alternative approach to using broad occupational categories is set out in a recent paper by Autor, Levy and Murname5 that divides human skills into five categories:

  1. Expert thinking: solving problems for which rule based solutions do not exist. Computers cannot substitute for human beings but can assist by making information more readily available
  2. Complex communication: interacting with other people to acquire or convey information and persuading others of the implications – examples might include some managers, teachers, sales people
  3. Routine cognitive: mental tasks closely described by rules such as routine processing application forms and claims – these jobs are often vulnerable to computerisation
  4. Routine manual: physical tasks closely described by rules, such as assembly line work and packaging. These repetitive tasks can in some circumstances also be undertaken by programmed machines
  5. Non-routine manual tasks: physical tasks hard to define by rules because they require optical and fine muscle control, including truck-driving and cleaning. Such jobs are unlikely to be assisted or replaced by computers.

The authors applied these categories to the US workforce between 1969 and 1998 and found that jobs requiring complex communication increased by nearly 14 per cent, and jobs requiring expert thinking increased by just over 8 per cent. All other jobs saw a declining share of employment over this period.

A recent large scale survey carried out by the Economist Intelligence Unit of top company executives and managers used a similar approach in identifying which skill sets would be most valuable in terms of competitive advantage in the year 2020. This adopted a five-category definition:

  • Complex knowledge based roles that are primarily outward facing and require developed communication and judgement skills
  • Complex knowledge based roles that are primarily inward-looking and require developed communication and judgement skills
  • Simple knowledge based roles that are rules-based, outward facing and do not require developed communication and judgement skills
  • Simple knowledge based roles that are rules based, inward facing and do not require developed communication and judgement skills
  • Production roles directly related to manufacturing or production processes.

Perhaps not surprisingly, 62 per cent of respondent’s said outward facing complex knowledge based roles would be most important for the organisation’s future competitive advantage, followed by 28 per cent saying inward facing knowledge based roles would be most important. The rest were cited by only 2 to 4 per cent of respondents as being important for future competitive advantage.

 This approach undoubtedly gets closer to defining knowledge jobs in terms of both cognitive complexity and the relationship to computers – in other words, what people actually do – and might be regarded as superior to simply classifying jobs by occupational title or educational qualification of the job holder. The disadvantage is that it requires either an extensive re-working of the statistics or original survey work and may not easily lend itself to direct comparisons with previous work or international comparisons.

Process and innovation measures

Another way to define the knowledge economy is to look at the share of output or employment produced by firms who are introducing new innovations in either processes or products. Some of the more commonly used indicators, for example, investment in R&D are an input measure that tells us little about the efficiency of R&D. Innovation measures measure output and capture a much wider range of activities.

The OECD definition includes both technological new products or processes and significant improvements in products and processes brought to market or used within the production process. The innovating firm is “one that has implemented technologically new or significant technologically improved products or processes”.

However, there are problems with the overall measure of this sort, too broad a definition: with most enterprises reporting innovation, the overall definition may not be very useful. The EU innovation scoreboard sets out a wide range of measures grouped under inputs and outputs, some derived from the CIS and others from Eurostat and OECD statistical measure scan be more useful. The scoreboard includes:

  • Innovation drivers (input measures): science and engineering graduates per 1000 population; population with tertiary education; broadband penetration; participation in life-long learning; youth education attainment level
  • Knowledge creation (input): R&D expenditure as % of GDP; share of high-medium tech R&D as % of manufacturing R&D; share of enterprises receiving public funding for innovation; share of university R&D financed by business sector
  • Innovation and entrepreneurship (input): shares of SMEs innovating, co-operating with others, introducing non-tech change; innovation spending as % of business turnover; early stages venture capital as % of GDP; ICT spending as % of GDP
  • Application (output): employment in high tech services as % of workforce; exports of high technology products as % of total exports; sales of new to firm products as % of turnover; employment in high to medium tech manufacturing as % of workforce
  • Intellectual property: EPO and USPTO patents per million population; triadic patent families per million population; new EU trademarks and designs per million population.

These measures are brought together in a single innovation summary index.

Organisational and presentational innovation

Standard definitions of innovation excludes two other forms of innovation, described by the Community Innovation Survey (CIS) as “organisational innovation” around changes in work practice and “presentational innovation” covering design and marketing.

The latest CIS asked a question covering both these forms of innovation and, not surprisingly, found a close link between the two forms of innovation. In other words, firms introducing new products and processes were also more likely to make innovations in work organisation.

These “softer” innovations may be a key distinctive feature of the knowledge economy, especially around the introduction of knowledge management practices. Not all of the competencies required for the knowledge economy are new – the soft-skills such as leadership, ability to work in teams, learning to learn, and communication and analytical skills have been a feature of the workforce for centuries. What is new – apart from specific IT skills – is the emergence of knowledge management skills based on making effective use of the ICT technologies to analyse, process and share information and knowledge among knowledge workers.

“Knowledge management” practices describe how organisations track, measure, share and make use of intangible assets such as an employee’s ability to think and react quickly in a crisis. The OECD identifies the following as key knowledge management practices:

  • Creating a knowledge sharing culture
  • Incentives policy to retain employees
  • Alliances for acquiring knowledge
  • Written knowledge management policy

Conclusions

Defining the knowledge economy is challenging precisely because the commodity it rests on – knowledge – is itself hard to pin down with any precision. Perhaps for this reason there are few definitions that go much beyond the general and hardly any that describe the knowledge economy in ways that might allow it to be measured and quantified.

Turning to more specific and measurable definitions, it is clear no single definition will capture all aspects of the knowledge economy. All indicators have advantages and disadvantages. An important concern is that of international comparability, given the shift to a knowledge-based economy is a global phenomenon taking place in virtually all OECD economies.

We will adopt the wide OECD/Work Foundation industry definition of the knowledge intensive industries (high to medium tech manufacturing, finance, telecommunications, business services, education and health). By this measure about 40 per cent of GDP in the UK is generated by knowledge intensive industries. However, we will need to make clear that the knowledge intensive industries are not the knowledge economy, for example, through work focusing on industries either entirely or partly omitted from the OECD wide definition of knowledge based industries such as energy supply, retail and the cultural creative industries.

We will retain the occupational definition of the knowledge economy workforce as the top three occupational groups of managers, professionals, and associate professionals. By this definition, just over 40 per cent of the UK workforce is “knowledge workers”. However, we will need to refine this definition. In particular the assumption that all managers are knowledge workers looks unsustainable, at least in the UK. We will also explore alternative approaches that get us closer to the essence of knowledge work, such as defining knowledge based workers as those in jobs requiring expert thinking and complex communication skills.

Definitions based on innovation by firms cover all industries in the market sector but lack precision. Innovation surveys suggest that over 60 per cent of UK business turnover and over 50 per cent of business employment is in firms that use new technology to introduce new products and processes. We will refine our innovation- based definitions, taking account of the latest findings form the Community Innovation Survey.

Innovation in “softer” areas such as work organisation, knowledge management, design and marketing are vital to understanding how the knowledge economy works within the firm but the link to competitiveness is poorly understood and often inadequately measured. We will explore these measures of knowledge- based innovation in more detail.

This note will not be the final word – as we take the programme forward we want to refine and develop our definitions and measures of the knowledge economy by stimulating debate and inviting others to set out their view on the future of the knowledge economy. One area we want to explore in the coming months, drawing on outside experience and expertise, is the option of developing more sophisticated composite indicator. We will be making contact with the relevant academics and officials at the EU and the OECD currently working on knowledge economy statistical definitions and indicators.

Based on extract from the work done by Ian Brinkley at  The Work Foundation
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