A Real-Time Evaluation of Intellectual Capital, Intellectual

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    A Real-time Evaluation of Intellectual Capital, Intellectual

    Property and Intellectual Property Rights in Early-stage

    On-line Enterprises

    Geoff Gregson; Richard Harrison

    Centre for Entrepreneurship Research, the University of Edinburgh Management School

    Abstract

    This paper examines how entrepreneurs create, develop and exploit their knowledge assets, in

    particular, their intellectual capital (IC), intellectual property (IP) and intellectual property

    rights (IPRs), in the knowledge economy. While the importance of knowledge assets for

    competitive advantage is acknowledged, few studies have examined the development and

    exploitation of knowledge assets in early-stage enterprises, given knowledge assetcharacteristics, knowledge management mechanisms to identify and protect relevant assets

    and internal and external factors. The research examines 16 early-stage enterprises (less than

    5 years) active in the digital economy over a two-year period and measures knowledge,

    business and external processes and consequences as they evolve, rather than as independent

    indicators measured at one point in time. The integrated analysis of each case includes four

    components; 1) creation, development and management of IC, IP and IPR; 2) outcomes - the

    valuation, utilisation and adaptation of IC, IP and IPR; 3) micro-factors affecting outcomes,

    that include enterprise strategy, business performance and complementary knowledge assets;

    and 4) macro-factors affecting outcomes, that include assessment of relevant legal, business

    and regulatory factors influencing IC, IP and IPR.

    Introduction

    The move towards a knowledge economy has been well documented in both academic and

    practitioner literature and has become a facet of current management orthodoxy (OECD,

    2001). Extensive research in a variety of academic disciplines has focused on different aspects

    of production, appropriation, and transfer of knowledge. While some researchers have

    concentrated on the learning process (Levinthal & March, 1993), others have emphasized the

    creation of knowledge (Nonaka & Takeuchi, 1995) and the transfer and replication of

    knowledge (Zander & Kogut, 1995).

    Accordingly, the conceptualisation of knowledge as intellectual capital and the management

    of knowledge are identified with creating competitive advantage in the knowledge economy

    (Prahalad & Hamel, 1990; Flood et al, 2002). Intellectual capital (IC) is identified with those

    components of knowledge that can be created through human capital and whose value can be

    identified and extracted (Harrison and Sullivan, 2000; WIPO, 2004). IC is also described as

    intellectual material that has been formalised, captured, and leveraged to produce a higher-

    valued asset (Stewart, 1997). IC may include not only traditional intangible assets, such as

    brand names, trademarks and goodwill, but also new intangibles, such as knowledge,

    technology value and good customer relationships.

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    Figure 1 shows the relationship of knowledge components within an enterprise, and identifies

    intellectual property (IP) as a sub-set of an enterprises intellectual assets (IA) used to extract

    value in the marketplace. Knowledge management (KM) activities may be present within the

    enterprise to organise value-creating activities and to capture and leverage IA. Wiig (1997)

    suggests that KM is identified within advanced enterprises as a deliberate strategy to renewand maximise the enterprise-wide value of IA.

    Figure 1. Key Components of Enterprise Knowledge (Source: Harrison and Sullivan (p. 35;

    2000)

    Knowledge is also identified as both a process and product among the untraded

    interdependencies that take the form of conventions, informal rules, and habits that

    coordinate economic actors under conditions of uncertainty (Storper, 1997: 5). In this

    context, both the value creation and value extraction processes, as identified in Figure 1, will

    be affected by untraded interdependencies existing within the enterprise and between the

    enterprise and its external environment (Dosi 1988; Teese 1986, 1996; Teece et al 1997) that

    may enable or constrain IA creation and use.

    For example, untraded interdependencies to extract value from IP may be affected not only by

    characteristics of IP but also by the efficiency of the legal mechanisms of protection (Teece

    1986; 2000). Leading from Teeces work, actor network theory (Callon 1987, 1992, Latour

    1987) and Molinas (1995, 1997, 1998) concept of sociotechnical constituencies suggest the

    need to examine IP given sectoral conditions, the regional context and legal regulations that

    determine opportunities and boundaries for the enterprises use of its IP (Molina and Gregson2002).

    The relationship between IC, IP and IPR, particularly in the early stages of new enterprise

    development, is not well understood. One question is the extent to which different models of

    innovation, resource acquisition and enterprise growth explain how IC, IP and IPR evolve in

    the critical early stages of new enterprises (e.g. Penrose 1959; Churchill and Lewis 1983;

    Mount et al 1993; Bhide 2000). Autio (2000) identifies an absence of studies examining

    optimal IP strategies for technology-based new firms.

    Previous studies within the UKs Economic and Social Research Council (ESRC) Intellectual

    Property Research Programme (1996-99) suggest that IPR is of little relevance to small

    businesses and their ongoing innovation except in specific sectors (Blackburn, 2003). For

    Intellectual capital (IC)

    Knowledge management (KM)

    Value creation

    Human capital

    (HC)

    Value extraction

    Intellectual

    assets (IA)

    IP

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    example, Tang (2003) identifies that getting products rapidly to consumers, rather than

    concerns over IPR, are most important for the on-line publishing sector. The traditional

    economic perspective identifies IPR as the reward for entrepreneurial judgement and risk,

    providing the knowledge creator and innovator with monopoly power and guaranteeing first-

    advantage (Casson 1990), allowing entrepreneurs to control the introduction of newknowledge to potential consumers and secure profits (Howells et al, 1998). The legal

    perspective for protecting IP is that innovations are hard to produce but easier to copy

    (Chidamber and Kon, 1994). A key recommendation from the ESRC IP Research Programme

    is that further research be undertaken on how enterprises evaluate their intellectual assets and

    how they assess whether or not these assets should be covered by IPRs.

    It is argued that the Internet and e-commerce is affecting knowledge creation for new

    enterprises entering the digital economy and changing business, legal and economic

    justifications for IP and IPR (Lessig 2002; Fowler 2001). Indeed, over the last decade, leading

    socio-legal academics have voiced concern that existing theories and public policies are

    falling behind a dynamic and evolving business reality of the digital economy (Arrow 1999;Dam 1993). Accelerated innovation and commercialisation of digital information goods

    challenge an economic, social and legal system previously developed for industrial rather than

    knowledge-based exploitation of IP. The Internet is the centre of academic debate over the

    IPR appropriability problem of balancing economic returns and legal protection with public

    disclosure to stimulate further invention. Lessigs (2002) assertion that law learns to

    regulate identifies the problem of increasing exclusivity to knowledge afforded IPRs that

    Lessig and others argue is incompatible with founding values of digital communication and

    the Internet.

    Research questions

    Three related questions have been identified in the literature for further study. The first

    question is how processes of IC, IP and IPR are created, developed and managed by new

    enterprises active in the digital economy (doing business through the internet), in particular,

    the underlying processes and decision-making activities to generate knowledge assets and the

    relationship between IC, IP and IPR as the enterprise evolves. This includes examining the

    incentives to invent, disclose, commercialise, design-around and invest in knowledge assets

    and the impact of knowledge management activities on how early-stage enterprises protect,

    exploit and manage their IP (Teece 2000).

    The second question relates to understanding the IC outcomes for enterprises doing businessin the digital economy and the extent to which IP and IPR is a strategic objective as the

    enterprise commences operations and develops over time. This includes examining pre-

    commercial expectations and perceptions of IC, IP and IPR value over time as the enterprise

    develops and the level of economic returns attributed to IC. Analysis of a number of

    enterprises could identify the types of knowledge assets, enterprises and sectors most

    vulnerable to information disclosure exposure that comes with a web-based presence.

    Analysis would identify how IP and IPR are used (e.g. to prevent imitation, as indication of

    value to potential investors, as a signal to competitors, as a first-mover strategy) and how

    enterprises combine technologies to enhance IP appropriability. This level of analysis would

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    also reveal other internal competencies of the enterprise that complement or constrain use and

    value of IC (Teece, 2000; Tang, 2003).

    The third question identifies the need to consider external factors that affect IC, IP and IPR

    creation, development and usage by early-stage enterprise. Few studies have examined thecosts and benefits of IP protection given varying legal and regulatory and sectoral conditions,

    particularly in the context of on-line enterprises (Davis, 2002). This includes examining the

    relationship between incentives, levels of protection and levels of public disclosure of IPRs,

    and the level of knowledge transmission actually gained from public disclosure as required in

    IPR application processes. This level of analysis would clarify how new enterprises protect

    their digital information (e.g. content and underlying algorithm) such as patent criteria of

    technical effect, novelty and inventive step (WIPO, 2004) and how IP usage by early-stage

    enterprises may be incongruent with existing laws and legal practices (Blackburn, 2003).

    Research design

    The research critically evaluates IC, IP and IPR in new enterprises involved in the digital

    economy using a social systems research design to accommodate the three integrated research

    questions. These knowledge assets are conceptualised as ongoing collective efforts involving

    actions and processes focused towards the pursuit of economic outcomes (Nelson, 1982).

    Actions and processes involve actors that may include the inventor, management team, IP

    lawyer, investor and a combination of public and private commercial support agents.

    Economic outcomes in this context are seen to evolve through the accretion of numerous

    institutional, resource and proprietary events that co-produce each other over an extend

    period (Van de Ven, 1993: 212). Since these events occur within a given a business,sectoral, regulatory and policy framework, a social systems approach provides a highly

    relevant research design, given that the research aspires to understand the factors that

    contribute to IC, IP and IPR creation and development as well as their market use, given a

    particular business context.

    The research identifies the case study as most appropriate for a social systems research

    approach. Yin (1989: 14) states that the case study investigates a contemporary phenomenon

    within its real life context, and that it is most relevant when the boundaries between

    phenomenon and context are not clearly evident, and when multiple sources of evidence canbe used in support of research questions. Given the need to understand IC and knowledge

    management processes of the enterprise, case studies allow research to go beyond evidence-collection to illustrate or explain the decisions and motivations that underlie observed

    processes (Sarantakos, 1993) and to identify and understand those detailed interactive

    processes crucial to understanding a complex business context (Bryman, 1988; Remenyi et al,1998). Case study analysis is also expected to lead to the identification of relevant legal,

    business and sectoral factors to qualify the external factors influencing management and

    extraction mechanisms and value outcomes.

    A participant observer approach will be undertaken to gain access to knowledge, perceptions

    and other insights as the enterprise and its intellectual assets evolve over time. This approach

    will explore the often tacit component of knowledge that resides in those people directly or

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    indirectly involved with the knowledge assets generated within each enterprise (Vincenti,

    1990).

    A total of 16 case studies of early-stage enterprises (less than 5 years) active in the digital

    economy and possessing identifiable IP will be undertaken over a two-year period. Asmentioned above, IC, IP and IPR are conceptualised as a combination of knowledge and

    people skills, physical and financial resources and external factors and the interactions

    between these elements. Within each case, characteristics of the enterprise are examined

    (origins and initial company profile, pre-commercial and start-up processes, evolution of IC

    into IP and IPR, enterprise strategy and performance) that reveals IC, IP and IPRmanagement

    mechanisms within each enterprise. A process continuum tool identifies, tracks and

    examines IC, IP and IPR value creation and value extraction mechanisms within the

    enterprise and how they change over time. Within each case, value outcomes are identifiedand measured to determine how both the enterprise and the market values IC, IP and IPR over

    time. The integrated analysis described above makes explicit processes, outcomes and

    changes to IC, IP and IPR within each case.

    The research will also develop an expert panel of leading academics and practitioners with

    assistance from the Arts and Humanities Research Board (AHRB) Research Centre for

    Studies in Intellectual Property and Technology Law at Edinburgh University. The expert

    panel will comprise a maximum of 24 (minimum of 18) experts that are identified by the

    research projects team as leaders in the fields of business, e-commerce and law.

    Figure 2 summarises the five elements of the research that drives the data collection process.

    Each element is further described below

    Figure 2. Research Design: Integrated Levels of Analysis

    3) ENTERPRISE ANALYSIS:

    enterprise strategy, performance

    & IC-IP-IPR assets

    1) IPRPROCESSES: creation,

    development & management2) IPR OUTCOMES:

    utilisation, valuation &

    adaptation

    4) EXTERNAL ANALYSIS:

    legal, regulatory & business

    impacts

    LEVELS

    OF IC, IP,

    IPR

    ANALYSIS

    5) EXPERT PANEL:

    business and legal expertise

    gathering& dissemination

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    IPR Process Continuum (element 1): IC, IP, IPR characteristics for each case study will beexamined using a process continuum to examine creation, development and management

    within the enterprise.

    IPR Outcome Analysis (element 2): This element examines IC, IP and IPR utilisation,valuation and ongoing adaptation for the enterprise over time.

    Enterprise Analysis (element 3):Characteristics of the enterprise are examined (origins and

    initial company profile, pre-commercial and start-up processes, evolution of IC, IP and IPR

    and their relationships, enterprise strategy and performance) that inform elements 1&2 and

    reveals how knowledge assets are managed within the enterprise.

    External Analysis (element 4):This examines the evolution of business, legal and regulatory

    environments and effects on the enterprise and IC, IP and IPR. Case study data are

    complemented by use of secondary data, legal, business and practitioner documents/reports

    and insights and feedback from expert panel.

    Expert Panel (element 5):Eachexpert will be contacted each month to respond to particular

    questions posed by the research team regarding insights arising during the research and new

    issues of relevance to the project and to offer feedback. The expert panel complements the

    empirical research and provides a credible, relevant and up-to-date regulatory, theoretical and

    conceptual knowledge resource.

    Case Study Selection and Research Phases

    The first phase of the research focuses on the defining, describing and examining knowledge

    assets in early-stage enterprises and their use in digital commerce. This includes acomprehensive review of current research on IC, IP and IPR, current business practice on the

    Internet, and identification of candidates for the expert panel.

    The second phase of the research is the selection of case studies, collection of data and case

    analysis. Cases will be selected in cooperation with the studys industrial partner -Technology

    Transfer and Innovation Ltd (TTI) using their database of over 1,000 companies. The case

    sample will include 8 early-stage enterprises (less than 5 years) with IC/IP generated for

    dedicated e-commerce and 8 early-stage enterprises with IC/IP generated off-line but adopted

    for e-commerce.

    Case selection criteria include the following:o Early-stage enterprise based in UK;o Commitment by senior management, accessibility over life of project;o Appropriate IC (identifiable IP used by enterprise as a key competitive asset

    (potential for copyright, patent, or trademark protection);

    o Cross-section of business sectors within sample (computer software, electronicpublishing, financial services, others);

    o Balance of cases with dedicated IC IC adapted for on-line use;o 2-3 cases in reserve to counter potential early drop-outs or closures.

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    Data will be collected through a regular schedule of monthly meetings with key actors of the

    knowledge asset constituency for each case during the project. Case study data are

    complemented by use of relevant documents and reports.

    Semi-structured interviews each month will extract evolving knowledge within the enterprisefrom people who may assume more than one of the roles below:

    Knowledge creator(s) and contributors; Company owner(s), entrepreneur(s), CEO, Managing Director(s); Legal staff and/or legal service provider(s); Technical staff working with IP; End-customers or intermediate customers; Collaborative partners (e.g. joint IP ownership, shared IP); Competitors.

    The third phase of the research is the integrated analysis of cases following the same fiveelements of the research design (see Figure 2). It is acknowledged that any ability to

    generalize from case studies depends upon the adequacy of the underlying theory and related

    knowledge and qualified by relevant contextual conditions (Mitchell 1983). However, given

    the sample size, data derived from the 16 case studies will provide multiple sources of

    evidence to offer a broader spectrum of analysis and higher construct validity.

    The fourth and final phase of the research will provide detailed analysis of research findings,

    the formulation of implications, conclusions and recommendations and the writing and

    presentation of final report(s). Research will be disseminated in various formats to target

    different academic and practitioner audiences, to include a methodological workshop to

    explain the social system approach to examining knowledge assets, conference presentationsand articles for relevant academic journals.

    Ethical considerations

    The research will gather information of a commercially and personally sensitive nature.

    Informed consent will be obtained from all research participants and identities will be

    codified to ensure confidentiality and anonymity. The information will not be used for

    commercial purposes either now or at any point in the future. The research will adopt

    guidelines suggested by the industrial partner TTI as part of their commitment to ensure good

    practice between academic partners and industry. The research will also be conducted within

    the terms of the University of Edinburgh School of Managements Code of Research Ethics.

    Conclusions

    The research provides a number of valuable intellectual contributions. It offers evidence to

    explain how new enterprises entering the digital economy assess, utilise and develop their

    knowledge assets and the costs and benefits of development, protection and disclosure for

    enterprises. In this regard, the research establishes the applicability of different models of

    innovation, resource acquisition and firm growth to explain how IC, IP and IPR evolve in the

    critical early stages of the on-line enterprise. The research also establishes the relevance of

    social system theories to our understanding of the roles and contributions of various actors,

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    legal regimes, sectoral and enterprise factors and the interrelations and interactions among

    them related to knowledge assets.

    The research identifies and describes the particular features of IC, IP and IPR, given

    enterprise strategy and knowledge management activities, knowledge asset characteristics,market and sectoral conditions and given legal and regulatory environments. Examining in-

    depth the evolutional development and use of IC, IP and IPR in multiple on-line business

    sectors will establish empirical evidence of where business, economic and legal justifications

    for knowledge assets and IPRs are in conflict with practice.

    Finally, development of an expert panel of academics and practitioners actively engaged in

    the knowledge asset field is expected to contribute significantly to qualifying case study

    insights as they emerge in this research. The research is expected to leverage the benefits of

    the expert panel to develop a more permanent network of interested parties to further develop

    and explore this important area of study.

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