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
ebooks
ebooksA special investigation by Andy McSmith
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

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003