Capitalizing flows of knowledge: models and accounting perspectives

Purpose – How to measure knowledge assets has become the focus of attention of scholars in two main fields: intellectual capital and knowledge management. This paper builds on the combination of reflections made by the authors focusing on complementary fields (so far developed separately despite their converging points): knowledge management/knowledge economy on the one hand, and ontological approaches to knowledge modelling on the other hand. By integrating core elements derived from these fields, the paper aims at providing some fundamental insights into the issue of formal modelling of knowledge capital measurement. Our analysis concerns: 1) the literature of intellectual capital measurement and knowledge accounting, to understand how the current evaluation methods consider the notion of “stock” and “flow” of knowledge, and the relationships between one another; 2) the discussion of a possible model of knowledge transfer, which is intended as the mechanism that builds the connection between flows and stocks; 3) the formalization of the relationships between flows and stocks of knowledge, with the purpose to work on a suitable model that can represent the starting point for further reflections on knowledge accounting methods. Design/methodology/approach – The creation of value can be typically connected to two main activities: a) the production of value by means of operative activities over time (producing goods, selling, delivering, etc.); and b) the accumulation of value (i.e. its capitalisation in the company’s assets) in appropriate “repositories” (e.g.: goods bought; investments; financial assets, etc.). These two activities are recorded into the main accounting charts, i.e. the income statement (that measures the value produced over time) and the balance sheet (that accounts for the accumulated capital). The accounting charts of buyer and seller just record the effects of these transactions, in terms of flows of value between them, and stocks of value that change their level by means of these flows. Here, there is a clear analogy with a physical system consisting of pipelines, through which the amount of “something” (measured in some way) flows between different reservoirs. In other words, the similarity to the physical passage of a good from one deposit to another is used to account the transfer of a “valuable property” from a buyer’s asset to a seller’s asset, and its monetary payback. Our paper intends to explore the implications of this reasoning when it comes to knowledge. Originality/value – When trying to model a system for knowledge measurement, we should consider two elements: 1) Knowledge that is exchanged with external players; 2) Knowledge which is (or becomes) part of the internal capital. The current difficulty to measure knowledge in business is linked to the lack of understanding of the relationships between knowledge exchanged with external players (i.e.: knowledge flows) and knowledge that is or becomes part of the internal capital (i.e.: knowledge stocks). In the typical accounting models, a good solution to this problem has been found, but the traditional accounting criteria (such as reliability and relevance, Stone & Warsono, 2003) are still difficult to implement to knowledge in a consistent way. In this paper we claim that ontology-driven conceptual analysis (Guarino 1995) may provide a deeper understanding of the relations and distinctions between knowledge flows and knowledge stocks and can, by this way, provide a fresh perspective on knowledge accounting. Although the high effectiveness of ontological analysis has been widely assessed since the 90’s with regard to different domains and problems, only in recent years ontologists have started to focus on organization and management science (Borgo et al. 2006). Practical implications - The capitalisation of knowledge as asset requires appropriate measurement systems, which preliminarily need to be based on suitable models of the knowledge to be estimated. As the literature demonstrates, how to measure knowledge in a way that can be of use to managers, is still controversial (Bose, 2004). A first important issue is that the measurement of knowledge can imply an effort of assessing different “objects” or aspects. For this reason, distinct techniques have been developed (Grossman, 2006; Liebowitz and Suen, 2000), which however gave evidence of the lack of consensus on a unified conceptual approach. Companies are very interested in these topics, since they have constantly to face the difficult task of deciding how to leverage on knowledge resources and setting the proper plans accordingly. Although this paper is mainly focused on foundational issues, the proposed analysis of knowledge flows and knowledge stocks goes into the direction of the above-mentioned picture and has to be seen as an initial step toward the utilization of knowledge as a value to be rigorously estimated by managers, especially in the area of networked firms.