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It is a global issue. While many macroeconomic theorists are engaged in a major professional debate about the role intangible capital plays in creating value, there is ample research at a national level. All this work, however, has implications for value creation at both the individual and enterprise level. The OECD has aligned around the conclusion that it is feasible to use the lifetime income approach to measuring human capital (Jorgenson/Fraumeni model) for comparative analysis, both across countries and over time. The concept of human capital is based on an analogy between investment in physical capital and investment in human beings. The common element is that present expenditures yield returns over the future.
Corrado, Hulten and Sichel (2009) suggest that at the firm-level, national income accounting practice has historically treated expenditures on intangible inputs as an intermediate expense and not as an investment that is part of GDP, although this has begun to change with the capitalization of software in the United States National Income and Product Accounts (NIPAs). This important evidence is a root revelation about why individual enterprise decision makers record expenditures on training and education as current period expenses (intermediate inputs) rather than human capital investments (capital formation).
The beliefs and behaviors of executives worldwide are also of particular priority if we are to create greater innovation and economic growth. Executives act to dilute the full value creation potential of expenditures on human capital and this is understandable. They are hard pressed to defend these expenditures when they reduce quarterly earnings per share.
The paradox is captured in the classic mantra-like executive response: “Our people are our most important asset.” Though currently largely a belief, OECD research supports the belief with data and analysis. The evidence is clear. Investment in human capital is far more important to creating value than investment in physical capital. There are entrenched beliefs held by executives that hide this value. And we need to change that!
Let’s consider the last post. First, in both policy and analytic circles there is a heightened interest in recognizing intangible assets (human capital) as drivers of innovation and value creation. As we are in a knowledge economy, most Organisation for Economic Co-operation and Development (OECD) countries are scrambling for ways to grow, and innovation strategies depend on sparking the flames of intangible assets.
Simultaneously, the economic crisis has raised concerns among researchers that investments in productivity-enhancing intangible assets might have been undermined. The knowledge economy is exploding, which again gives evidence to intangible assets. Companies such as Apple and Google have less than 5% in tangible assets on their balance sheets. So while the economic jobs reports are bleak (in general), knowledge-based firms cannot find the skilled workers they need.
So here is the problem. While American firms spent approximately $164 billion on training and development in 2012, access to the full value creation potential is not currently available to key decision makers. Both macroeconomic theory and firm accounting policies and practices are the primary blockages to fulfilling the value creation potential.
The results of much research — including Lui’s (2011) paper titled “Measuring the Stock of Human Capital for Comparative Analysis: An Application of the Lifetime Income Approach to Selected Countries,” published in the OECD Statistics Working Papers – indicate that the estimated value of human capital is substantially greater than that of traditional physical capital. These results estimate the value of human capital to be approximately eight- to 10-times greater than traditional physical capital.
For the past couple of centuries income per capita in the developed world has grown substantially. Research shows that most, if not all, of this growth has come from improvements in productivity. Most people today understand that we are in a knowledge-based economy and that innovation has had a major effect on productivity at all levels — including the firm, industry, and country. These innovations come from R & D, patents, designs, and just plain great critical thinking.
Ample evidence exists today that the stated natural law of learning creates value exists. So why is it that most organizations that hire employees are unwilling to spend money on increasing the innovation and critical thinking of what they frequently call their most important asset — “their people.” Why is it that these same organizations that invest millions and billions of dollars in buildings and infrastructure fail to invest in their people when approximately 90% of the U.S. economy is driven by the Service Sector. And why is it that our accounting profession fails to recognize “human capital investment” as “capital” rather than as an expense. The challenge is to define what specific, executable actions policy makers and executive decision makers need to make to take advantage of this natural law to create value for individuals, organizations, and nations.