Knowledge Economy

An economy dependent on human capital and intangible assets, such as proprietary technology

What is the Knowledge Economy?

The knowledge economy is focused on the essential importance of human capital in the 21st-century economy. The rapid expansion of knowledge and the increasing reliance on computerization, big data analytics, and automation are changing the economy of the developed world to one that is more dependent on intellectual capital and skills, and less dependent on the production process.

 

Knowledge Economy

 

The term “knowledge economy” was popularized by famed business management consultant, Peter Drucker, first in his 1966 book, “The Effective Executive,” and then further in his 1969 book, “The Age of Discontinuity.” Drucker was well ahead of his time with his emphasis on knowledge/skills, data analysis and measurable performance, and strategic management by objectives (MBO).

 

Summary

  • The knowledge economy, which is the primary economy among developed nations, is an economy dependent on human capital and intangible assets, such as proprietary technology.
  • The knowledge economy has placed the IT/ICT industries at the forefront of overall economic growth.
  • Skill sets that include data analysis, creating and working with financial models, and the ability to innovate are highly sought after in the modern economy.

 

A Change in Skill Requirements and a Shift in Assets

The knowledge economy is characterized by the presence of a higher percentage of highly skilled employees whose jobs require special knowledge or skills. Unlike in the past, when the economy depended heavily on unskilled labor jobs and consisted primarily of producing physical goods, the modern economy is comprised more of services industries and jobs that require thinking and analysis of data.

The modern economy is also known as the post-industrial economy or the information economy – a reference to the central importance of information technology (IT) in the economies of developed nations.

In the new knowledge economy, the most valuable assets that a company owns are often intangible assets – such as patents, copyrights, or proprietary software or processes. It is in contrast to previous economic epochs – the agrarian economy, where land was usually the primary asset, and the industrial economy, where manufacturing plants and equipment were key assets for most businesses.

 

What Does the Knowledge Economy Look Like?

The knowledge economy both supports, and is fueled by, innovation, research, and rapid technological advancement. The overwhelming majority of workers in the knowledge economy are extremely computer literate and skilled at creating business and financial models. There is an increasing emphasis on data collection and analysis, and on the development of algorithms and artificial intelligence (AI).

Harvard Business School professor, Michael Porter, the creator of Porter’s Five Forces Model for business analysis, argues that in today’s economy, the ability of a business to develop and maintain a competitive advantage in the marketplace is more and more dependent on its ability to quickly adapt to an ever-changing world by using continual innovation in its processes and business systems. Research and development projects absorb an increasing percentage of a company’s resources.

There is a back-and-forth between research centers, universities, and think tanks, and the businesses that utilize their discoveries. In turn, the emphasis on knowledge and innovation in the business world spurs further and more rapid growth in information and data analysis and manipulation in the academic world.

 

The Growth of STEM Jobs

The knowledge economy is considered the primary driver of the massive expansion of what is known as STEM jobs. STEM is short for “science, technology, engineering, and mathematics.” Careers within the STEM fields – which includes occupational paths such as computer science, engineering, chemistry, and biology – are where many of the greatest opportunities for career advancement, higher compensation, and top-level executive positions can be found.

The bottom line is that knowledge provides the foundation for the necessary technical expertise, data collection and analysis skills, and innovative management practices that enable companies and businesses to compete in the modern, global economy. Specialized knowledge and skills may serve as either productive assets for a business to employ, or as products for a business to market and sell.

Another characteristic of the knowledge economy is the development of “clusters” of industries that are centered in a particular geographic area. Examples include the concentration of automotive engineering businesses in Germany, computer technology in “Silicon Valley” in the United States, and the electronics industry in South Korea.

 

Knowledge Economy - Silicon Valley

 

The Knowledge Economy in Action – Examples

You can see the growth and impact of the knowledge economy in virtually any sector of the economy that you look at. For example, the knowledge economy’s effect on traditional manufacturing, such as the automotive industry, can be seen in the reliance on automation, the use of “just-in-time” inventory management systems, and the push to develop driverless cars.

The healthcare industry is both a key contributor to the knowledge economy and a primary beneficiary of it. More rapid research and the development of new medicines, the increased use of 3D and robotic surgical aids, and the explosion of telemedicine services are all a reflection of the knowledge economy.

The ICT (information and communications technology) industry, which is focused on the integration of communications services and information technology and on information infrastructure, is a prime example of the knowledge economy. The ICT industry aims to increase the efficient use of information by connecting data storage facilities, such as computer servers, with the means of transmitting information, such as cell phones.

Information technology expenditures – measured as a percentage of revenue by companies – are up more than 50% since the turn of the century, reflecting the central importance of IT to business profitability. The highest growth rates in the IT/ICT industries are currently seen in companies engaged in the creation of new technologies, such as AI and robotics.

 

Problems Created by the New Economy

The transition from an industrial economy to a knowledge economy is not without its challenges. There are currently many workers who lack the requisite skill sets to function and be optimally productive in a knowledge economy.

In order to facilitate the transition, companies need to develop more extensive on-the-job training programs, along with supporting employees in obtaining further education and training outside of the workplace – such as subsidizing employees attending university classes or learning new skills elsewhere.

In addition, universities must be aware of the most valuable skills in the marketplace, so that they can offer the best possible education for students. For example, schools should offer and emphasize expanded programs to prepare students for STEM careers.

 

Learn More

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Key Performance Indicators (KPIs)
  • Just-in-Time Method
  • Machine Learning (in Finance)
  • Intangible Assets

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!