The knowledge-based economy: Profit is all in the mind

Peter Koenig asked DTI economists working on the White Paper what the intellectual underpinnings were for their work. This is a summary.

Knowledge has been the key to economic success for centuries. But in a study to accompany the Government's competitiveness White Paper out next week, the DTI team argue that the role of knowledge in the modern economy is growing rapidly.

The World Bank declared recently: "The balance between knowledge and resources has shifted so far towards the former that knowledge has become perhaps the most important factor determining the standard of living."

The knowledge-driven economy is not just a hi-tech or science-based story. It is just as relevant to textiles manufacturing as it is to electronics or pharmaceuticals, to the Post Office as much as to the City of London, to a corner shop using computerised accounts as much as to Marks & Spencer, the DTI says.

What is behind the changes? The DTI work emphasises four factors. Steady and sometimes startling advances in science and technology, particularly in biotechnology, and the revolution in computer technology are the most obvious. But the changes are also driven by increasingly global competitive pressures and by the new demands created by rising incomes and changing consumer tastes.

The DTI paper surveys the fast-growing economic and business literature on the role of knowledge in the economy. Recent work by economists on the sources of growth puts increasing emphasis on technology, human capital and knowledge, in contrast to earlier models which focused on labour and capital.

Trade specialists and business strategists warn that countries like the UK cannot hope to compete on cost alone. Instead, companies in the more advanced economies need to rely on their knowledge assets - the skills of their workforce, the quality of their design, their brands, and the ingenuity of their R&D. According to research reported in the White Paper, Britain's trade performance has been strongest in industries which use more skilled labour and invest more in R&D. Firms like ICI are recognising this and reinventing themselves as knowledge-driven companies.

Management experts also increasingly emphasise the importance of a firm's "knowledge capital". Companies like Microsoft have stock market valuations that soar far above the physical assets they own. The company's value resides mainly in its skills, its R&D, and its intellectual property. Training and knowledge management is therefore crucial to success, as more and more companies like Unilever, Skandia and BP are recognising.

The knowledge revolution also has implications for location. Michael Porter, the Harvard Business School professor who held talks with Peter Mandelson this week, emphasises the importance of "clusters" - like Silicon Valley, the City of London, or the Italian shoe industry around Milan.

This might seem paradoxical, since the leap in communications technology ought to make location less important. But while that may be true of knowledge that can be codified and written down, it is much less true of the "tacit knowledge" built up and inherent in the business. According to the DTI economists, tacit knowledge is the real source of competitive advantage and its diffusion is much easier in a cluster or network of firms.

The DTI analytical work underpinning the White Paper covers a wide range of issues and raises questions about the sources of competitiveness and about policies towards the regions, inward investment, education and skills, the development of electronic commerce, competition, finance and entrepreneurship.

The forging of legislation based on this work begins on Wednesday when the White Paper is introduced in the House of Commons.

Start your day with The Independent, sign up for daily news emails
Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'